Accounting 9706/32 February/March 2020: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 A 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.
Read Source A1 in the Insert.
(a) Prepare the manufacturing account for the year ended 31 December 2019.
Workings:
[8]
(b) Prepare the income statement for the year ended 31 December 2019.
Workings:
[7]
(c) Calculate the amount at which finished goods are included in inventory at 31 December 2019.
…… [2]
(d) Explain, with the support of accounting concepts, the treatment of unrealised profit on finished goods in both the income statement and statement of financial position.
…… [5]
(e) Advise the directors of T Limited whether or not they should continue basing the transfer price on the price paid to an outside supplier. Justify your answer.
…… [3]
[Total: 25]
Mark scheme
1(a) T Limited 8
Manufacturing account for year ended 31 December 2019
$
Opening inventory 17 300
Purchases 200 400
Carriage inwards 6 600 (1)
Closing inventory (18 700)
Cost of raw materials consumed 205 600 (1)
Direct wages 206 400
Direct expenses 8 600
Prime cost 420 600 (1)OF
Rent and rates W1 45 000 (1)
Repairs W2 13 500 }
Depreciation W3 32 000 }(1)
511 100
Opening work in progress 20 400 }
Closing work in progress (21 500) }(1)
Cost of production 510 000
Manufacturing profit 122 400 (1)OF
Transferred value 632 400 (1)
1(a) 3
W1 ( $72000 + $3 000 ) × = $45 000
5
3
W2 $18 000 × = $13 500
4
2
W3 $48 000 × = $32000
3
1(b) T Limited 7
Income statement for the year ended 31 December 2019
$ $
Sales revenue 782 000
Less: cost of sales
Opening inventory 55 000 × 120% 66 000 (1)
Transfer value 632 400
Closing inventory (75 888)
622 512
Gross profit 159 488 (1)OF
Manufacturing profit 122 400 (1)OF *
281 888
Administrative expenses W1 116 700 (1)
Carriage outwards 16 300
Increase in unrealised profit W2 3 688 (2)OF
Profit for the year 145 200 (1)OF
2 1 1
W1 $66 200 + $75 000 × + $18 000 × + $48 000 × = $116 700
5 4 3
$122 400
W2 = 24 %
510 000
24
$75 888 × (1)OF – ($55 000 × 20%) = $3 688 (1)OF
124
*This profit figure in the income statement has to be the same as in the manufacturing account for the mark.
1(c) 2
$
Inventory: finished goods 75 888
24
Unrealised profit 75 888 ×
124 14 688 (1)OF
61 200 (1)OF
1(d) Responses could include: 5
• prudence concept (1)
• profit/assets not overstated (1)
• realisation concept (1)
• profit is unrealised because goods have not been sold to customers (1)
• unrealised profit deducted from the transfer value of finished goods inventories, showing the cost of finished goods
inventories in the statement of financial position (1)
• increase in unrealised profit is deducted from the profit in the income statement (1)
Max 5
Accept other valid points
1(e) In favour of 3
• it can help to make more meaningful price comparisons (1)
• the manufacturing department may be more motivated to control costs (1)
Against
• the process may be time consuming (1)
• the price of the outside supplier may fluctuate throughout the year (1)
Max 1 mark for in favour of, 1 mark for against, 1 mark for decision
Accept other valid points
Read Source A2 in the Insert.
(a) Prepare the café trading account for the year ended 31 December 2019, showing clearly the closing café inventory.
…… [5]
Additional information
The club had prepared an income and expenditure account for the year ended 31 December 2019.
The following items were shown in the income and expenditure account.
$
Subscriptions 322 000
Administrative expenses 251 100
Depreciation: furniture and fixtures 16 640
(b) Prepare the receipts and payments account for the year ended 31 December 2019.
Workings:
[8]
(c) State two differences between an income and expenditure account and a receipts and payments account.
1 ……
2 ……
[2]
Additional information
The treasurer is aware that in early 2020, the club will receive two sums of donations from two wealthy members. One donor intends his donation to be used for maintaining the general running of the club in future years. The other donor intends his donation to be used for building a swimming pool in a few years’ time.
(d) Explain the appropriate accounting treatment for the donation for:
(i) maintaining the general running of the club in future years
…… [4]
(ii) building a swimming pool in a few years’ time.
…… [3]
Additional information
In view of the large cash balance in the club, the committee is thinking of making a distribution to the existing members, just like paying a dividend to shareholders in a limited company.
(e) Advise the committee whether or not the proposed distribution should be made. Justify your answer.
…… [3]
[Total: 25]
Mark scheme
2(a) 5
Cafe trading account for year ended 31 December 2019
$ $
Cafe sales 240 000
Opening inventory 13 000
Purchases 141 000
Closing inventory (difference) (16 000) (1)OF
Cost of sales 138 000 (1)OF
Gross profit W1 102 000 (3)OF
1 3
W1: $240 000 × × 50% (1) + $240 000 × × 40% (1) = $102 000 (1)OF
4 4
2(b) 8
Receipts and payments account
$ $
Balance b/d 33 500 Cafe trade payables W2 137 800 (1)
Subscriptions W1 320 500 (2) Cafe wages W3 51 000 (1)
Cafe sales 240 000 (1) Administrative expenses 251 100
Furniture and fixtures 35 000 (2) W4
Balance c/d 119 100
594 000 594 000
Balance b/d 119 100 (1)OF
W1 $322 000 + ($3 800 – $2 600)(1) + ($1 500 – $4 200)(1) = $320 500
W2 $26 400 + $141 000 – $29 600 = $137 800
W3 $46 000 + $5 000 = $51 000
W4 ($66 560 – $48 200)(1) + $16 640 = $35 000 (1)
2(c) 2
Income and Expenditure Account Receipts and Payments Account
• revenue and expenditure • cash receipts and payments
• accrual basis • cash basis
• can include non-cash item such as
depreciation • cash items only
• include revenue expenditure • can include capital expenditure
1 mark × 2 differences
Accept other valid points
2(d)(i) Responses could include: 4
• covering more than one year (1)
• accrual concept (1)
• revenue matches general running expenses (1)
• capitalise donation (1)
• transfer to income and expenditure account over a number of years (1)
Max 4
Accept other valid points
2(d)(ii) Responses could include: 3
• capital receipt credited to capital reserve (1)
• cannot be recognised in income and expenditure account (1)
• should be used for the purpose specified by the donor (1)
• reserve debited when pool expenditure incurred in the future (1)
Max 3
Accept other valid points
2(e) Responses could include: 3
• purpose / objective of the club (not-for-profit organisation) is for social, athletic or charitable, etc, not for profit making
(1)
• funds of the club must be held in trust for the club and can only be used in carrying out its objective / mission (1)
• the committee is not correct in distributing club surplus to the members (1)
Max 2 valid points plus further 1 mark for correct advice
Accept other valid points
Read Source A3 in the Insert.
(a) Calculate the value of goodwill of each of Ahmed’s and Omar’s businesses.
…… [6]
(b) Prepare the statement of financial position of the partnership at 1 January 2020 if goodwill is included.
…… [6]
Additional information
The profit and loss sharing ratio between Ahmed and Omar is 3:2.
Both partners also agreed that goodwill would not be maintained in the books of account.
(c) Calculate the capital account balance of each partner after goodwill is eliminated.
…… [2]
(d) Explain the meaning of the term ‘goodwill’.
…… [3]
(e) Explain why the goodwill account is not maintained in the books of the partnership. Support your answer by reference to the accounting concepts.
…… [4]
Additional information
The partners plan to purchase additional equipment costing $80 000. They are considering making loans to the partnership or applying for a bank loan.
(f) State one advantage and one disadvantage to the partnership of each option.
Making loans to partnership
Advantage
Disadvantage
Applying for a bank loan
Advantage
Disadvantage
[4]
[Total: 25]
Mark scheme
3(a) 6
Ahmed Omar
$ $
Plant and equipment 230 000 144 000
Motor vehicles 71 000 40 000
Inventories 52 500 34 400
Cash at bank – 28 600
Trade receivables 58 000 52 000
Trade payables (42 500) (34 100)
Bank overdraft (8 900) –
360 100 (1) 264 900 (1)
Business value 400 000 (1) 300 000 (1)
Goodwill 39 900 (1)OF 35 100 (1)OF
3(b) Ahmed and Omar 6
Statement of financial position
at 1 January 2020
$
Non-current assets
Plant and equipment 374 000 }
Motor vehicles 111 000 }(1)
Goodwill 75 000 (1)OF
560 000
Current assets
Inventories 86 900 }
Trade receivables 110 000 }(1)
Cash at bank 19 700 (1)
216 600
Total assets 776 600
Capital and liabilities
Capital – Ahmed 400 000 }
Capital – Omar 300 000 ](1)
700 000
Current liabilities
Trade payables 76 600 (1)
Total capital and liabilities 776 600
3(c) 3 2
Ahmed $400 000 − $75 000 × = $355 000 (1)OF
5
2
Omar $300 000 − $75 000 × = $270 000 (1)OF
5
3(d) Responses could include: 3
• intangible asset (1)
• excess of a business’s value over its total net assets value (1)
• usually occur in acquisition of business or change in partnership (1)
• business image, strong customer base, good relationship with suppliers, good location etc (1)
Max 3
Accept other valid points.
3(e) Response could include: 4
• money measurement (1) – goodwill is recorded as an asset as a result of the acquisition of a business, not a merger,
where the purchase consideration is quantifiable in monetary terms (1)
• prudence (1) – value of asset is not overstated (1)
1 mark for one accounting concept identified up to a maximum of two, plus further 1 mark for explanation / development
3(f) Responses could include: 4
Loan from partners
Advantages:
• time and cost saved (1)
• no collateral required (1)
• potentially lower interest rate (1)
• repayment of loan is more flexible (1)
Disadvantages:
• partners may not have enough funds (1)
• partners don’t want to lend as they have already contributed capital (1)
3(f) Bank loan
Advantages:
• interest rate is the market rate which is objective (1)
• may be able to raise more money (1)
Disadvantages
• loan interest may be higher (1)
• collateral may be required (1)
• application for loan may be costly / time-consuming (1)
• bank may turn down the application (1)
• the business is perceived as risky as long-term liabilities increase (1)
Max 1 mark for advantage and Max 1 mark for disadvantage of each of the option.
Max 2 for each option
Accept other valid points
Read Source A4 in the Insert.
(a) Calculate, to two decimal places, the following ratios:
(i) earnings per share ……
…… [2]
(ii) price earnings ratio ……
…… [1]
(iii) dividend cover ……
…… [1]
(iv) dividend yield. ……
…… [1]
Additional information
The directors of J plc aim to maintain a higher dividend cover in the coming three years.
(b) Explain why the directors wish to maintain a higher dividend cover.
…… [3]
Additional information
During the year ended 31 December 2019, J plc was sued by a customer for the breach of a sales contract. The case will be heard in court in May 2020. The lawyer of J plc advises the directors that it is highly probable that the company will be found liable and the compensation is likely to be
$20 000. No accounting entries have been made to record this.
(c) Define the following terms:
(i) liability ……
…… [2]
(ii) provision ……
…… [2]
(iii) contingent liability. ……
…… [2]
(d) Explain the accounting treatment of the expected compensation of $20 000 in the financial statements by making reference to the relevant International Accounting Standard (IAS).
…… [6]
Additional information
J plc needs additional funds for future expansion. The directors are considering the following two options:
option 1 : rights issue of ordinary shares
option 2 : further issue of 6% debentures.
(e) Advise the directors which of the two options they should choose. Justify your answer.
…… [5]
[Total: 25]
Section B : Cost and Management Accounting
Answer all questions.
Mark scheme
4(a)(i) ( 588 000 − 48 000 )(1) $0.27 (1)
2
2 000 000
4(a)(ii) $3.2 1
OF 11.85 (1)OF
$0.27
4(a)(iii) $0.27 OF 1
2.25 times (1)OF
$0.12
4(a)(iv) $0.12 1
3.75% (1)
$3.20
4 (b) Responses could include: 3
• smaller proportion of profit is distributed to the shareholders (1)
• want to maintain higher retained earnings (1)
• there may be capital commitments in the future (1)
• may attract investors (1)
Max 3
Accept other valid points
4(c)(i) Liability is a present obligation (1) arising from past events (1), the settlement of which is expected to result in an outflow 2
from the entity of resources (1) embodying economic benefits. Max 2
4(c)(ii) Provision is a liability of uncertain timing (1) and amount (1) to cover a probable future event. (1) Max 2 2
4(c)(iii) Contingent liability is a possible obligation that arises from past events (1) and whose existence will be confirmed only by 2
the occurrence or non-occurrence of one or more uncertain future events (1) not wholly within the control of the entity.(1)
Max 2
4(d) According to IAS 37 (1), it is a liability (1) because it is the present obligation (being sued) arising from the past event (the 6
sale contract) (1) and it is probable (more than 50%) that there is outflow of resources (1). J plc should make a provision
of $20 000 (1) resulting in a reduction a profit of $20 000 (1) and an increase in current liabilities of $20 000. (1) Max 6
4(e) Responses could include: 5
Rights issue:
• share capital is a more permanent form of capital (1)
• rights issue is only limited to existing shareholders (1)
• control of the company maintained (1)
• dividend payments are discretionary should profits fall (1)
Debenture:
• funds may be generated more quickly (1)
• can raise the full amount of funds with greater certainty (1)
• no voting rights (1)
• interest must be paid / decreases profit (1)
• gearing ratio will increase (1)
• loan will have to be repaid (1)
Max 2 for rights issue
Max 2 for debentures
1 mark for decision
Accept other valid points
Read Source B1 in the Insert.
(a) (i) Explain the meaning of the term ‘master budget’.
…… [2]
(ii) State two components of a master budget (other than production and purchases).
1 ……
2 ……
[2]
(b) Prepare the following budgets for each of the months of February and March 2020.
(i) Production budget (in units)
…… [4]
(ii) Purchases budget (in kilos)
…… [6]
Additional information
There will be an increasing trend in the purchase price of direct materials. The purchase price of direct materials for the first three months is expected to be:
per kilo
$
January 3.25
February 3.50
March 3.60
Z Limited adopts the first-in, first-out (FIFO) method to value direct materials inventory.
(c) Calculate the budgeted cost of direct materials consumed for the month of February 2020.
Workings:
[4]
(d) Explain the impact on profit of using FIFO and average cost (AVCO) in the circumstances of rising direct materials price.
…… [4]
Additional information
The marketing manager of the company is of the opinion that due to the unpredictable economic climate, it is not worthwhile to prepare a budget.
(e) Discuss whether or not the marketing manager’s opinion is correct. Justify your answer.
…… [3]
[Total: 25]
Mark scheme
5(a)(i) Responses could include: 2
• financial plan of the company as a whole for the coming year (1)
• summarising the plans the company uses to achieve its strategic goals (1)
• an aid to coordinate the budgets of various departments (1)
Max 2
5(a)(ii) Responses could include sales, labour, trade receivables, trade payables and cash (1) 2
Max 2
5(b)(i) 4
Working
Feb March April
Sales 4000 4800 (1 both) 4400
Closing inventory W1 960 880 (1 both) 1000
4960 5680 5400
Opening inventory W2 (800) (960) (1 both) (880)
Units to be produced 4160 4720 (1OF both) 4520
W1 4800 × 20% = 960
4400 × 20% = 880
W2 4000 × 20% = 800
5(b)(ii) Working 6
Feb March April
Units to be produced 4 160 OF 4 720 OF 4 520
3 kilos per unit ×3 ×3 ×3
Raw materials required (kilos) 12 480 14 160 (1 OF both) 13 560
Ending inventory W1 1 416 (1)OF 1 356 (1)OF
13 896 15 516
Opening inventory W2 (1 248) (1)OF (1 416) (1)OF
Direct materials to be purchased 12 648 14 100 (1 OF both)
5(b)(ii) W1 14 160 × 10% = 1416
13 560 × 10% = 1356
W2 12 480 × 10% = 1248
5(c) 4
Feb
$
Opening inventory W1 4 056 (1)OF
Direct materials purchased W2 44 268 (1)OF
Closing inventory W3 (4 956) (1)OF
Cost of raw materials consumed 43 368 (1)OF
W1 1 248 OF × $3.25 = $ 4 056
W2 12 648 OF × $3.50 = $44 268
W3 1 416 OF × $3.50 = $ 4 956
5(d) Responses could include: 4
FIFO :
• earlier material prices (lower prices) charged to cost of raw materials consumed
• closing inventory valued by the latest prices (higher prices)
AVCO
• average cost (average of lower prices and higher prices) charged to cost of raw materials consumed
• closing inventory valued by the average cost
5(d) FIFO produces a higher inventory value than AVCO. Hence cost of raw materials consumed (cost of sales) using the
FIFO method will be lower than when using AVCO.
Profit using FIFO method will be higher than when using AVCO
1 mark for explaining FIFO
1 mark for explaining AVCO
1 mark for comparing the cost of raw materials consumed (cost of sales) or inventory value of both methods
1 mark for comparing the profit of both methods
5(e) Responses could include: 3
• budget is the blue print guiding the company (1)
• budget help coordinating among the needs of various department (1)
• budget motivate people (1)
• budgetary control by comparing the budget with the actual result (1)
• difficult to prepare budget in a changeable economy (1)
• time consuming and costly to revise budget frequently (1)
Max 1 mark for valid point ‘for’, Max 1 mark for valid point ‘against’ plus further 1 mark for decision.
Accept other valid points
Read Source B2 in the Insert.
(a) Calculate for the proposed investment:
(i) the payback period (in months) ……
…… [3]
(ii) the net present value (NPV) ……
…… [4]
(iii) the internal rate of return (IRR). ……
…… [4]
(b) Advise the directors whether or not they should buy the machine. Justify your answer by reference to your calculations in part (a).
…… [4]
Additional information
The cost of the machine, $480 000, includes the purchase price plus a 20% tariff (import duty) on the purchase price. Due to a recent trade agreement, it is highly probable that the 20% tariff will be abolished.
On the basis that the tariff is to be abolished, the directors have recalculated the payback period and NPV and decided to buy the machine.
(c) Comment on the directors’ decision to buy the machine when the tariff is abolished. Support your answers with relevant calculations.
…… [6]
(d) Explain why the directors of W Limited use the payback period and NPV to make their investment decisions.
…… [4]
[Total: 25]
Mark scheme
6(a)(i) 3
Receipts Payments Net
$ $ $
Year 1 260 000 90 000 170 000
Year 2 290 000 120 000 170 000
Year 3 330 000 140 000 190 000
Year 4 130 000 80 000 50 000
6(a)(i)
2 years (1) +
( 480 000 − 340 000 )(1)
190 000
2 years 8.84 months => 2 years 9 months or 33 months (1)OF
6(a)(ii) 4
Net 10% PV
$ $
Year 0 (480 000) 1 (480 000) (1)
Year 1 170 000 0.909 154 530 }
Year 2 170 000 0.826 140 420 }(1)
Year 3 190 000 0.751 142 690 }
Year 4 50 000 0.683 34 150 (1)
(8 210) (1)OF
6(a)(iii) 4
Net 7% PV
$ $
Year 0 (480 000) 1 (480 000)
Year 1 170 000 0.935 158 950
Year 2 170 000 0.873 148 410
Year 3 190 000 0.816 155 040
Year 4 50 000 0.763 38 150
20 550 (1)
1
1
O
F
3% × 20 550
7%(1) + ( ) OF = 9.14% ( )
28 760
6(b) W Limited should not buy the machine because of negative NPV (1) and IRR is less than the cost of capital. (1) 4
W Limited could buy the machine because the payback period is one year and three months before the useful life which
is 4 years. (1)
Max 3 marks for justifications
1 mark for decision
6(c) $480 000 × 100 6
Cost of machine is now $400 000 (1)
120
Net 10% PV
$ $
Year 0 (400 000) 1 (400 000)
Year 1 170 000 0.909 154 530
Year 2 170 000 0.826 140 420
Year 3 190 000 0.751 142 690
Year 4 50 000 0.683 34 150
71 790 (1)OF
Alternative method:
$
Previous NPV ($480 000) (8 210)
Saving on cost 80 000 (1)
Revised NPV 71 790 (1)OF
Payback period is :
2 years +
( 400 000 − 340 000 )(1)
190 000
2 years 3.8 months => 2 years 4 months or 28 months (1)
The directors decide to buy the machine because of positive NPV (1) and the payback period is shortened. (1)
6(d) Net present value 4
• considers time value of money (NPV of –$8210 with tariff versus NPV of $71 790 without tariff) (1)
• considers the whole life of asset, i.e. 4 years (1)
• considers the cash flows (1)
Payback period
• easy to calculate and understood (1)
• need to know when the investment can be recouped (33 months with tariff versus 28 months without tariff) (1)
Max 2 marks for NPV and Max 2 marks for payback period
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