Accounting 9706/32 February/March 2021: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 A Level Structured Questions, February/March 2021. 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) Explain how purchased goodwill may arise.
…… [4]
(b) Calculate the amount of consideration payable by P Limited to Euan.
…… [2]
(c) Prepare the statement of financial position of P Limited immediately after acquiring Euan’s business. Use the space provided on the next page to show your workings.
Workings:
[13]
Additional information
The directors consider that acquiring Euan’s business can bring future economic benefits to
P Limited.
(d) Explain how acquiring Euan’s business can bring the benefits to P Limited.
…… [6]
[Total: 25]
Mark scheme
1(a) Purchased goodwill occurs when a business acquires another business (1) 4
It is the cost of acquisition (1) in excess of the fair value (1) of the separately identifiable net assets (1) of the acquired
business.
1(b) $ 2
Ordinary shares 450 000 (1)
Motor vehicle 28 000 }
Cash 60 000 }(1)
538 000
1(c) $ 13
Non-current assets
Property, plant and equipment W1 1 220 000 (2)
(4)
Goodwill W2 115 000 OF
1 335 000
Current assets
Inventories 258 000 (1)
Trade receivables 432 000 (1)
Cash and cash equivalents 153 000 (1)
843 000
Total assets 2 178 000
Equity and liabilities
Share capital of $1 each 1 500 000 (1)
Share premium 150 000 (1)
General reserve 90 000 }
Retained earnings 177 000 }(1)
Equity 1 917 000
Current liabilities
Trade payables 261 000 (1)
Total equity and liabilities 2 178 000
W1
$935 000 + $305 000(1) – $20 000(1) = $1 220 000
1(c) W2
$ $
Purchase consideration 538 000 (1)OF
Value of net assets acquired
Property, plant and equipment 244 000 × 1.25 305 000 (1)
Inventories 63 000
Trade receivables 125 000 × 96% 120 000 }
Trade payables 69 000–4000 (650 00) }(1) 423 000
Goodwill 115 000 (1)OF
1(d) Future economic benefits are potentially contributing to the net increase in cash flows (1) or profit (1) to the business. This 6
can be achieved by:
• increase in the revenue (1) of P Limited due to good relationship of customer / good location / well-known business
name (1) etc of Euan.
• reducing the operating costs (1) of P Limited due to good employee morale making the business more efficient /
good relationship with suppliers of Euan / synergy effect (1) etc.
Max 6
Accept other valid points.
Read Source A2 in the insert.
(a) Calculate the life membership fund shown in the statement of financial position at
31 December 2019.
…… [3]
Additional information
The treasurer of the club has prepared the receipts and payments account for the year ended
31 December 2020 as follows:
Receipts and payments account
$ $
Balance b/d 3 200 Purchase of club equipment 24 000
Membership subscriptions 73 000 Clubhouse expenses 37 000
Special donation 10 000 Administrative expenses 46 000
Life membership fees 8 000
Sale of club equipment 2 200
Balance c/d 10 600
107 000 107 000
The special donation of $10 000, received during 2020, is designated for the club’s anniversary activities in 2022. The treasurer is unsure whether this amount should be treated as income for the year ended 31 December 2020.
(b) State three differences between a receipts and payments account and an income and expenditure account.
1 ……
2 ……
3 ……
[3]
(c) Explain to the treasurer, with reference to the appropriate accounting concepts, the accounting treatment of the special donation of $10 000 in the financial statements of the club.
…… [5]
Additional information
1 During the year ended 31 December 2020, an item of fully depreciated club equipment, which had an original cost of $8000, was sold for $2200.
2 It is the club’s policy to depreciate club equipment at an annual rate of 20% using the reducing balance method. A full year’s depreciation is charged in the year of acquisition.
3 Selected balances at 31 December 2020 and at 31 December 2019 were extracted as follows:
2020 2019
$ $
Club equipment – cost ? 88 000
Club equipment – accumulated depreciation ? 52 000
Membership subscriptions in advance 1 100 2 700
Membership subscriptions in arrears 1 800 3 800
Administrative expenses paid in advance 0 4 200
Clubhouse expenses accrued 0 2 660
Administrative expenses accrued 650 0
(d) Prepare the income and expenditure account for the year ended 31 December 2020.
Use the space provided on the next page to show your workings.
Workings:
[8]
Additional information
The chairman of the club decided to transfer $6000 from the accumulated fund to a fund designated for the anniversary activities on 31 December 2020.
(e) (i) Calculate the accumulated fund at 31 December 2019.
…… [3]
(ii) Prepare a statement showing the movement on the accumulated fund for the year ended
31 December 2020.
…… [3]
[Total: 25]
Mark scheme
2(a) $ 3
2019 $6500 × 4/5 5 200 }
2018 $4000 × 3/5 2 400 }(1)
2017 $4500 × 2/5 1 800 }
2016 $2000 × 1/5 400 }(1)
2015 $1000 × 0/5 0
9 800 (1)
2(b) 3
Receipts and payments account Income and expenditure account
a summary of cash receipts and payments a summary of incomes (revenue) and expenses
includes both capital and revenue items includes only revenue items
includes only cash items includes both cash and non-cash items
includes receipts and payments regardless of the includes incomes and expenses relating to the period
period they belong to the account is prepared
opening balance and closing balance represent there is no opening balance and the closing balance
balances at bank and cash representing surplus or deficit is transferred to
accumulated fund
.
1 mark for each difference up to a maximum of 3 differences.
Accept other valid differences.
2(c) Accrual / matching concept (1) – income is recognised in the accounting period to which it relates. (1) 5
– matching income with the expenses. (1)
Prudence concept (1) – to ensure that income / surplus is not overstated. (1)
Special donation is designated for the 2022 anniversary activities. It should be deferred (1) and to be recognised as income
in 2022 in order to match the 2022 anniversary activities expenses. It is not recognised as income in 2020 (1) and should
be recorded as deferred income / fund in the 2020 statement of financial position. (1)
Max 2 marks for accounting concepts and Max 3 for accounting treatment
2(d) 8
$ $
Membership subscription W1 72 600 (2)
Life membership fees W2 5 000 (1)
Profit from sale of club equipment 2 200 (1)
79 800
Club house expenses W3 34 340 (1)
Administration expenses W4 50 850 (1)
Depreciation of club equipment W5 12 000 (1)
97 190
Excess of expenditure over income / Deficit (17 390) (1)OF
W1 $73 000 + $2700 – $3800(1) + $1800 – $1100(1)=$72600
W2 ($8000 + $6500 + $4000 + $4500 + $2000) × 1/5 = $5000
W3 $37 000 – $2660 = $34 340
W4 $46 000 + $4200 + $650 = $50 850
W5 ($88 000 + 24 000 – $52 000) × 20% = $12 000
2(e)(i) $ 3
Club equipment - cost 88 000
Club equipment - accumulated depreciation (52 000)
Membership subscriptions in advance (2 700)
Membership subscriptions in arrears 3 800
Administration expenses paid in advance 4 200
Club house expenses accrued (2 660)
Bank/cash 3 200 (1)
Life membership fee (9 800) (1)OF
Accumulated fund at 31 December 2019 32 040 (1)OF
2(e)(ii) $ 3
Accumulated fund - 1 January 2020 32 040
Deficit for the year (17 390) (1)OF
Transferred to anniversary fund (6 000) (1)
Accumulated fund - 31 December 2020 8 650 (1)OF
Read Source A3 in the insert.
(a) Prepare the statement of changes in equity for the year ended 31 December 2020, showing the profit for the year as the balancing figure. A total column is required.
…… [7]
Additional information
The following transactions took place during the year ended 31 December 2020.
1 Additional machinery was purchased at the cost of $93 000.
2 A motor vehicle was sold for $26 000. It had a net book value of $29 000 at the date of disposal.
3 Interest paid and charged to the income statement amounted to $19 500.
(b) Prepare a statement of cash flows for the year ended 31 December 2020 in accordance with
IAS 7. Use the space provided on the next page to show your workings.
Workings:
[13]
(c) Assess the impact of the payment of the dividend and the partial repayment of the debenture on the cash and cash equivalents at 31 December 2020 of T Limited.
…… [5]
[Total: 25]
PLEASE TURN OVER
Mark scheme
3(a) Ordinary Share Revaluation Retained 7
shares premium reserve earnings Total
$ $ $ $ $
At 1 January 2020 600 000 48 000 75 000 162 400 885 400
Dividend paid (96 000) (1) (96 000)
Bonus shares 60 000 } (48 000) } (12 000) (1) –
New issue 50 000 } 20 000 }(1) 70 000
Revaluation 25 000 (1) 25 000
Profit for the year 66 720 (1)OF 66 720
At 31 December 2020 710 000 20 000 100 000 121 120 (1)OF 951 120 (1) W1
W2
W1 Equity at 31 December 2020 = $1 292 520 – $341 400 = $951 120
W2 Retained earnings at 31 December 2020 = $951 120 – $710 000 – $20 000 – $100 000 = $121 120
3(b) Statement of cash flows at 31 December 2020 13
$ $
Cash flows from operating activities
Profit from operations ($66 720 + $19 500) 86 220 (1)OF
Depreciation W1 64 000 (3)
Loss on disposal 3 000 (1)
Increase in inventories (15 000) }
Increase in trade receivables (45 120) }(1)
Increase in trade payables 8 400 (1)
Cash from operations 101 500
Interest paid (19 500) (1)
Net cash from operating activities 82 000
Cash flows from investing activities
Purchases of machinery (93 000) }
Sale proceeds from sale of motor vehicle 26 000 }(1)
Net cash used in investing activities (67 000)
Cash flows from financing activities
Repayment of debenture (80 000) (1)
New issue of shares 70 000 (1)
Dividend paid (96 000) (1)
Net cash used in financing activities (106 000)
Net decrease in cash and cash equivalents (91 000) (1)
Cash and cash equivalents at the start of the year 49 000
Cash and cash equivalents at the end of the year (42 000)
W1 $842 000 + $25 000(1) + $93 000(1) – $29 000(1) – $867 000 = $64 000
3(c) • T Limited has positive cash flow before repayment of debentures and dividend paid. $101 500 – $67 000 + $70 000 – 5
$19 500 = $85 000.(1)
• Both the repayment of debenture and payment of dividend make T Limited turn from a positive cash position to a
negative cash position. $85 000 – $80 000 – $96 000 = ($91 000) (1)
• T Limited turns from a positive cash position to a negative cash position if only dividend but not debenture is paid. (1)
• Although T Limited has enough retained earnings to pay dividend, paying $96 000 has great impact on the cash
position. T Limited should reduce paying cash dividend and increase the bonus shares instead. (1)
• T Limited is still in a positive cash position if only debenture but not dividend is paid. (1)
• Early repayment of debenture however can save interest. (1)
• Repayment of debenture can be deferred as the maturity date is in 2024–25 (1)
Max 5
Accept other valid points.
Read Source A4 in the insert.
(a) State two benefits to each of the following groups when a company issues preference shares.
(i) the directors
1 ……
2 ……
[2]
(ii) the preference shareholders
1 ……
2 ……
[2]
Additional information
Retained earnings at 1 January 2020 amounted to $195 000.
During the year 2020, the preference shares dividend, $28 000, and the ordinary shares dividend,
$90 000, were paid.
A dividend of $0.05 on each of the ordinary shares was proposed at the end of the year.
(b) Calculate the profit from operations for the year ended 31 December 2020.
…… [3]
Additional information
The market value of one ordinary share at 31 December 2020 was $1.80.
(c) Calculate the following ratios to two decimal places for 2020.
(i) return on capital employed (ROCE)
…… [1]
(ii) dividend cover
…… [2]
(iii) dividend yield
…… [2]
(iv) gearing
…… [2]
Additional information
The directors consider that the gearing ratio of W plc is too high.
(d) Explain three actions the directors could take to reduce the gearing ratio.
1 ……
2 ……
3 ……
[6]
Additional information
A director of W plc considers that both the debenture and the preference shares adversely affect the ordinary shareholders.
(e) Advise the director whether or not he is correct. Justify your answer.
…… [5]
[Total: 25]
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a)(i) To the directors (Max 2) 4
• long-term fund for the operation of the company (1)
• without the dilution of management control (1)
• fixed dividend, which is good for cash budgeting as the amount of dividend payment is certain (1)
4(a)(ii) To the preference shareholders (Max 2)
• prior claim of dividend before ordinary shareholders (1)
• prior claim of net assets before ordinary shareholders when the company is liquidated (1)
• fixed dividend.
Accept other valid points.
4(b) $ 3
Retained earnings at 31 December 2020 252 000
Retained earnings at 1 January 2020 (195 000)
Preference shares dividend paid 28 000 }
Ordinary shares dividend paid 90 000 }(1)
Debenture interest 21 000 (1)
Profit from operations 196 000 (1)OF
4(c)(i) Return on capital employed 1
$196 000 (OF) / ($1 252 000 + $300 000) 12.63% (1)OF
4(c)(ii) Dividend cover 2
($196 000(OF) – $21 000 – $28000)(1)/$90 000 1.63 times (1)OF
4(c)(iii) Dividend yield 2
[($90 000/600 000) + $0.05] (1) /$1.80 11.11% (1)OF
4(c)(iv) Gearing 2
($350 000+$300 000)(1)/($1 252 000+$300 000) 41.88% (1)OF
4(d) • issue more ordinary shares (1) to increase equity (1) 6
• reduce dividend (1) and retain more profits (1)
• repay debenture / redeem preference shares (1) to reduce non-current liabilities (1)
Max 3 points × 2
1 mark and 1 mark for development.
Accept other valid points.
4(e) The debenture interest and preference share dividend reduce the profit available to the ordinary shares (1) 5
Debenture interest rate 7% is lower than the ROCE 12.63% (1)
Preference share dividend rate 8% is lower than the ROCE 12.63% (1)
Ordinary shares enjoy a higher return, i.e. the return in excess of 7% and 8% belong to the ordinary shareholders. (1)
There is no dilution of ownership for ordinary shareholders. (1)
1 mark for decision and 1 mark for each valid point up to a maximum of 4.
Read Source B1 in the insert.
(a) Define the term ‘variance analysis’.
…… [2]
(b) Explain two benefits of performing variance analysis.
1 ……
2 ……
[4]
Additional information
Actual results for 2020 were as follows:
Sales and production 7 500 units
Direct materials (14 200 kilos) $154 000
Direct labour (22 000 hours) $342 000
Fixed overhead $148 000
(c) Prepare a statement to show the flexed budgeted total production costs for 2020.
…… [3]
(d) (i) Calculate the direct material variance.
…… [1]
(ii) Explain the reasons for the direct materials variance. Support your answer with appropriate calculations.
…… [4]
(e) (i) Calculate the direct labour variance.
…… [1]
(ii) Explain the reasons for the direct labour variance. Support your answer with appropriate calculations.
…… [4]
(f) Calculate the overhead absorption rate.
…… [1]
(g) Calculate the fixed overhead volume variance.
…… [2]
Additional information
N Limited plans to manufacture another product in 2021. A director suggests that the company should use activity based costing (ABC) in 2021. However, another director suggests that the existing cost basis should be retained.
(h) Advise the directors whether or not the company should use ABC in 2021. Justify your answer.
…… [3]
[Total: 25]
Mark scheme
5(a) Investigation to explain the difference (1) between a budgeted amount and an actual amount (1). 2
5(b) Maintain control (1) to set / achieve targets (1) 4
Address the problems (adverse variance/underperformed) (1) and take remedial action (1)
Understand the strength (favourable variance/over performed) (1) and reinforce the strength (1)
Review the standards (1) to minimise deviations from budget (1)
Max 2 points × 2
1 mark and 1 mark for development.
Accept other valid points.
5(c) $ 3
Direct materials 150 000 }
Direct labour 337 500 }(1)
Fixed overhead 135 000 (1)
Production costs 622 500 (1)OF
5(d)(i) $154 000 – $150 000 = $4000(A) (1) 1
5(d)(ii) Material price variance $154 000 – $(14 200 × $10) = $12 000 (A) (1) 4
The price of materials has increased causing adverse variance (1)
Material usage variance (15 000–14 200) × $10 = $8000(F) (1)
Materials of better quality have been used resulting using lesser materials (1)
Max 4
5(e)(i) $342 000 – $337 500 = $4500(A) (1) 1
5(e)(ii) Labour rate variance $342 000 – (22 000 × $15) = $12 000(A) (1) 4
The hourly rate of labour has increased. (1)
Labour efficiency variance (22 500 – 22 000) × $15 = $7500(F) (1)
Labour is more efficient (1)
5(f) $18/3 = $6 per labour hour (1) 1
5(g) [(8000 – 7500) × 3)] × $6 = $9000(1)OFA(1) 2
5(h) For ( Max 1) 3
• a more realistic allocation of fixed overhead between various products (1)
• better pricing for each product (1)
Against (Max 1)
• costly in analysing information to prepare cost basis (1)
• time consuming in collecting information (1)
1 Mark for decision.
Accept other valid points.
Read Source B2 in the insert.
(a) State two benefits of preparing budgets.
1 ……
2 ……
[2]
(b) Prepare the production budget for each of the months from April to June.
…… [5]
Additional information
Each unit of product requires 2 kilos of raw materials. Materials are purchased one month before they are used for production. 50% of purchases for the month are paid in the month of purchase to receive a 5% cash discount and the remaining 50% are paid in the following month. Cost of raw materials is expected to be $8 per kilo.
(c) Prepare the purchases budget for each of the months from April to June.
…… [6]
(d) Calculate the amount to be paid for purchases for each of the months from April to June.
…… [7]
Additional information
The product is sold at $40 per unit. In late May 2021, F Limited is expected to receive an extra order from a long-term customer for 300 units to be delivered by the end of June 2021. However,
F Limited will be at its maximum production capacity in June 2021. To fulfil the order, F Limited would have to purchase these units from an outside supplier at a cost of $38 per unit.
(e) Advise whether or not F Limited should accept the order and purchase 300 units from an outside supplier. Justify your answer.
…… [5]
[Total: 25]
Mark scheme
6(a) • Responsibility accounting (1) 2
• Management control of business activities (1)
• Motivating departments/functions (1)
• Co-ordinating activities of departments/functions (1)
• Planning ahead, remedial actions can be taken if shortage of resources is identified (1)
Max 2
Accept other valid points.
6(b) April May June 5
Closing inventory 390 } 450 } 420 }(1) row
Sales 2 400 2 600 3 000
Opening inventory (360) } (390) } (450) }(1) row
Units to be produced 2 430 (1) 2 660 (1) 2 970 (1)
6(c) April May June 6
(1) W
Production of following month 2 660 (1)OF 2 970 (1)OF 2 755 1
Kilos per unit 2 2 2
Cost per kilos $8 $8 $8
$42 56 $47 52 $44 08
Purchases 0 (1)OF 0 (1)OF 0 (1)OF
W1 375 + 2800 – 420 = 2755
6(d) April May June 7
$ $ $
Purchases of current month 42 560 47 520 44 080
50% thereof with 5% cash discount(a) 20 216 (1)OF 22 572 (1OF) 20 938 (1)OF
Purchases of previous month *38 880 42 560 47 520
50% thereof(b) 19 440 (1)OF 21 280 (1OF) 23 760 (1)OF
Total paid to suppliers(a)+(b) 39 656 43 852 44 698 (1)OF row
*2430 × 2 × $8 = $38880
6(e) For (Max 2) 5
• Maintain the relationship with the long-term customer (1)
• F Limited can still make a profit of $2 each (1)
Against (Max 2)
• Quality not assured (1)
• Delivery time not assured (1)
1 Mark for decision.
Accept other valid points.
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