Accounting 9706/22 February/March 2020: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 AS Level Structured Questions, February/March 2020. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
The following information is available for S Limited for the year ended 31 December 2019.
Balances at 1 January 2019
$
Inventory 122 000
Administrative expenses accrued 3 875
Amounts paid during the year ended 31 December 2019
Distribution costs 84 475
Administrative expenses 298 875
Purchases 435 000
Amounts received during the year ended 31 December 2019
Revenue 998 400
Balances at 31 December 2019
Inventory 134 200
Administrative expenses prepaid 7 500
6% debenture (2024) 100 000
The following information is also available.
1 Inventory at 31 December 2019 included some damaged goods which had cost $5000. These goods can only be sold for $3000 after repairs costing $700 have been carried out.
2 The 6% debenture (2024) was issued on 1 September 2019.
REQUIRED
(a) Prepare the income statement for the year ended 31 December 2019.
S Limited
Income statement for the year ended 31 December 2019
Workings:
[10]
Additional information
The following additional balances were also available at 1 January 2019.
$
Ordinary shares of $1 each 100 000
Share premium 20 000
Retained earnings 126 230
1 An interim dividend of $0.08 per share was paid on 30 June 2019.
2 A bonus issue of one ordinary share for every four shares held was made on 31 October 2019.
Reserves were maintained in their most flexible form.
3 A final dividend of $0.09 per ordinary share was proposed on 31 December 2019.
REQUIRED
(b) Explain what is meant by ‘Reserves were maintained in their most flexible form’.
[2]
(c) Prepare the ordinary share capital account for the year ended 31 December 2019.
Ordinary share capital account
$ $
[4]
(d) Prepare the statement of changes in equity for the year ended 31 December 2019.
S Limited
Statement of changes in equity for the year ended 31 December 2019
Share Retained
Share capital premium earnings Total
$ $ $ $
[5]
Additional information
The directors are planning to acquire more machinery in the following year and require a further investment of $50 000. They are considering two options:
option 1: issue an additional 6% debenture for $50 000
option 2: make a rights issue of one ordinary share for every five shares held at a premium of $1 per share.
REQUIRED
(e) Advise the directors on which option they should choose. Justify your answer.
[9]
[Total: 30]
Mark scheme
1(a) S Limited 10
Income Statement for the year ended 31 December 2019
Revenue 998 400
Cost of sales
Opening inventory 122 000
Purchases 435 000
557 000
Closing inventory W1 (131 500) (2)
(425 500) (1)OF
Gross profit 572 900 (1)OF
Deduct
Administrative expenses W2 287 500 (3)
Distribution costs 84 475 (371 975)
Profit from operations 200 925 (1)OF
Finance costs (2 000) (1)
Profit for the year 198 925 (1)OF
W1 134 200 – 2 700 (1) = 131 500 (1)OF
W2 298 875 – 3 875 (1) – 7 500 (1) = 287 500 (1)OF
1(b) Using capital reserves before revenue reserves (1) to facilitate future payments of 2
dividends (1).
Accept other valid responses.
1(c) Ordinary Share Capital 4
2019
Jan 1 Balance b/d 100 000 (1)
Oct 31 Share premium 20 000 (1)
Oct 31 Retained Earns. 5 000 (1)
Dec 31 Balance c/d 125 000
125 000 125 000
2020
Jan 1 Balance b/d 125 000 (1)OF
1(d) S Limited 5
Statement of changes in equity for the year ended
31 December 2019
Share Share Retained Total
Capital Premium Earnings
$ $ $ $
Jan 1 100 000 20 000 126 230 246 230
Dividend (8 000) (1) (8 000)
Bonus 25 000 (20 000) (1) (5 000) (1)
Profit 198 925 (1)OF 198 925
Dec 31 125 000 – 312 155 437 155 (1)OF
1(e) 9
Debenture (Max 4) Rights issue (Max 4)
Loan capital – repayable (1) Permanent capital – not repayable (1)
Interest of $3000 payable annually (1) Dividend payments discretionary (1)
No voting rights for dividend holders (1) Shareholders have voting rights (1)
Increases external borrowings (1) Increases equity holding (1)
Security required (1) No security required (1)
Decision (1) Justification (Max 8)
Accept other valid responses.
Depreciation is provided for by a business when accounting for non-current assets.
(a) (i) State three possible causes of depreciation.
1 ……
2 ……
3 ……
[3]
(ii) Explain two accounting concepts which are applied when providing for depreciation.
1 Concept ……
Explanation
2 Concept ……
Explanation
[4]
The directors of K Limited prepare financial statements to 31 December. They have provided the following information.
Balances at 1 January 2019
$
Motor vehicles cost 180 000
Motor vehicles provision for depreciation 105 000
During the year ended 31 December 2019
1 A new motor vehicle was acquired for $50 000.
2 A motor vehicle which had cost $40 000 and been depreciated by $17 500 was sold for
$16 500.
The company policy is to depreciate motor vehicles at 25% per annum using the reducing balance method.
A full year’s depreciation is charged in the year of acquisition and none in the year of disposal.
REQUIRED
(b) Prepare for the year ended 31 December 2019:
(i) motor vehicles provision for depreciation account
Motor vehicles provision for depreciation account
$ $
[6]
(ii) disposal account
Disposal account
$ $
[2]
[Total: 15]
Mark scheme
2(a)(i) Wear and tear (1) 3
Usage (1)
Obsolescence (1)
Passage of time (1)
Depletion (1)
Economic factors (1)
Technological changes (1)
Accept other valid responses.
Max 3
2(a)(ii) Accruals/matching concept (1). The cost of the asset is matched with the income 4
generated over the lifetime of the asset (1).
Prudence concept (1). To avoid overstating profits / non-current assets (1).
2(b)(i) Motor vehicles – Provision for depreciation account 6
2019 2019
Dec 31 Disposal 17 500 (1) Jan 1 Bal b/d 105 000 (1)
Dec 31 Bal c/d 113 125 Dec 31 I/S 25 625 (3) W1
130 625 130 625
2020
Jan 1 Bal b/d 113 125 (1 of)
W1: 12 500 (1) +13 125 (1) = 25 625 (1)OF
2(b)(ii) Disposal account 2
Dec 31 Cost 40 000 ** Dec 31 Prov for Dep 17 500 **
Dec 31 Bank 16 500 ** (1)
Dec 31 I/S 6 000 (1)
40 000 40 000
** 1 mark for all three entries.
Eden runs a small business and has provided the following information for the year ended
31 December 2019.
$
Trade receivables at 1 January 2019 45 000
Contra sales ledger to purchases ledger 780
Discounts allowed 1 025
Discounts received 695
Interest charged on a customer’s overdue account 65
Irrecoverable debt 945
Receipts from trade receivables 128 600
Returns inwards 2 500
Returns outwards 1 800
Total sales 190 000
20% of total sales are cash sales; the remainder are credit sales.
REQUIRED
(a) Explain three advantages to a business of preparing control accounts.
1 ……
2 ……
3 ……
[6]
(b) Prepare the sales ledger control account for the year ended 31 December 2019.
Sales ledger control account
$ $
[9]
[Total: 15]
Mark scheme
3(a) They provide a check on the arithmetical accuracy of the balances on the sales and 6
purchases ledger/helps in locating errors (1). The balance on the control account
should equal the total of the individual balances (1).
Prevents fraud (1). Division of duties – different person working on the control
account to the sales and purchases ledger (1).
Helps in preparation of financial statements (1). Speedier as total entered in trial
balance rather than individual balances (1).
Max 6
Accept other valid responses.
3(b) Sales ledger control account 9
2019 2019
Jan 1 Balance b/d 45 000 (1) Dec 12 Ret. Inwards 2 500 (1)
Dec 31 Sales 152 000 (1) Irrec. Debts 945 (1)
Interest 65 (1) Bank 128 600 (1)
Disc. Allowed 1 025 (1)
Contra 780 (1)
Balance c/d 63 215
197 065 197 065
Jan 1 Balance b/d 63 215 (1)OF
Cuthbert runs a manufacturing business which has two production departments and one service department. The business allocates and apportions overhead expenditure between production and service departments.
REQUIRED
(a) Explain one difference between overhead allocation and overhead apportionment.
[2]
(b) State what is meant by:
(i) a production department
[1]
(ii) a service department
[1]
Additional information
The following budgeted information has been provided.
$
Rent 18 000
Heating and lighting 12 500
Depreciation 11 200
Employee overheads 8 300
50 000
Production Production Service department 1 department 2 department
Area (Square metres) 4 500 3 000 1 500
Electricity used (Kilowatt hours) 60 000 30 000 10 000
Non-current assets at net book value ($) 75 000 45 000
Number of employees 45 25 13
Direct labour hours 4 000 1 200
Machine hours 1 500 2 000
Service department costs are re-apportioned on the basis of electricity used.
REQUIRED
(c) Complete the table to apportion the budgeted overheads to each department. Re-apportion the service department costs to the two production departments.
Production Production Service
Overhead department 1 department 2 department Total
$ $ $ $
Rent
Heating and lighting
Depreciation
Employee overheads
Service department re-apportionment
[8]
(d) Calculate the overhead absorption rate for both production departments using an appropriate basis. Give your answers to two decimal places.
Production department 1
Production department 2
[4]
(e) Explain the reason for the re-apportionment of the service department costs.
[2]
(f) State three limitations of using absorption costing.
1 ……
2 ……
3 ……
[3]
Additional information
A customer made a request for a special order.
The manufacture of this order would require direct materials of $2 800 and direct labour of $3 200.
Production department 1 Production department 2
Direct labour hours 80 20
Machine hours 30 100
Cuthbert wishes to achieve a profit margin of 35% on this order.
REQUIRED
(g) Calculate the price to quote for this special order.
[4]
Additional information
The customer offered $9 000 for this order.
REQUIRED
(h) Advise Cuthbert whether or not he should accept the order. Justify your answer.
[5]
[Total: 30]
Mark scheme
4(a) Overhead allocation is used when the whole expense is directly related to one 2
department (1).
Overhead apportionment is used when the overhead is related to more than one
department (1).
4(b)(i) A production department is one which is directly involved in manufacturing the 1
products (1).
4(b)(ii) A service department is one which is not directly involved in manufacturing the 1
products but provides support to other departments (1).
4(c) 8
Overhead Production Production Service Total
Centre 1 Centre 2 Centre
Rent 9 000 6 000 3 000 18 000 (1)
row
Heating and 7 500 3 750 1 250 12 500 (1)
lighting row
Depreciation 7 000 4 200 11 200 (1)
row
Employee 4 500 2 500 1 300 8 300 (1)
Overheads row
28 000 16 450 5 550 50 000
Service centre 3 700 (1)OF 1 850 (1)OF (5 550)
re-apportionment
31 700 18 300
(1)OF (1)OF
4(d) 31700 4
Prod.1 = $7.93 (1)OF per direct labour hour (1)
4 000
18 300
Prod. 2 = $9.15 (1)OF per machine hour (1)
2 000
4(e) Service centres incur overhead costs and these costs are charged to the product by 2
transferring to the production centres on an appropriate basis (1).
To ensure that all costs are recovered in the sale of products (1).
Accept other valid responses.
4(f) Not used for short-term decision making (1). 3
Cannot calculate break-even point (1).
Can be subjective (1).
Accept other valid responses.
4(g) Direct costs ($2800 + $3200) 6 000.00 (1) 4
Overheads Dept 1 ($7.93 × 80) 634.40 (1)OF
Overheads Dept 2 ($9.15 × 100) 915.00 (1)OF
Total cost 7 549.40
Price to quote $7 549.40 ( OF) × 100/65: $11 614.46 (1)OF
4(h) Accept the order (1). 5
There is both a positive contribution (1) and profit / lower profit margin (1)
Is there spare capacity? (1) Would acceptance of the order restrict other orders that
would be more profitable? (1)
Consider whether customer is likely to make more orders (1) and at which price (1).
Consider effect on other customers learning of reduced price (1).
1 for decision and max. 4 for discussion.
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Accounting 9706/22 for February/March 2020 is out of 90 marks, with 1 hour 30 minutes to answer it, across 4 questions.
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