Accounting 9706/22 February/March 2022: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 AS Level Structured Questions, February/March 2022. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Rafiq owns a retail business. When the business was opened a few years ago, Rafiq maintained only minimal accounting records.
REQUIRED
(a) State two reasons why the owner of a business might maintain minimal accounting records.
1 ……
2 ……
[2]
(b) Identify four benefits of maintaining full accounting records.
1 ……
2 ……
3 ……
4 ……
[4]
Additional information
More recently Rafiq has been able to provide more detailed financial information.
1 On 1 January 2021, the business’s assets and liabilities were as follows:
$
Cash in hand 840
Bank overdraft 1 390
Furniture and fittings at valuation 22 710
Trade payables 11 870
Inventory 14 430
Rent prepaid 1 250
2 The following summary of receipts and payments for the year ended 31 December 2021 has been prepared from the business’s bank statements.
Receipts $ $
Cash sales banked 132 200
Disposal of furniture and fittings 3 480
Total receipts 135 680
Payments
Drawings 18 390
Trade payables 93 100
Rent 14 750
Additional furniture and fittings 8 000
Installation costs for new fittings 380
General expenses 5 940
Total payments 140 560
3 Rafiq purchases all goods for resale on a credit basis.
4 All sales are on a cash basis.
5 A cash discount of 5% was received when Rafiq settled debts with trade payables during the year ended 31 December 2021.
6 At 31 December 2021 trade payables totalled $9230.
REQUIRED
(c) Calculate the total purchases for the year ended 31 December 2021.
[3]
Additional information
During the year ended 31 December 2021:
1 Some cash takings were not banked but were used to pay wages, $21 540, and drawings,
$2580.
2 Rafiq took goods costing $480 for private use.
3 Furniture and fittings with a value of $2950 were sold.
At 31 December 2021:
1 Cash takings of $1200 had not yet been banked.
2 The balance of cash in hand was $920.
3 Inventory was valued at $11 920.
4 Furniture and fittings were valued at $23 400.
5 Rent of $1440 was prepaid.
REQUIRED
(d) Prepare the income statement for the year ended 31 December 2021.
Workings:
Rafiq
Income statement for the year ended 31 December 2021
[14]
Additional information
Rafiq would like to expand his business but requires additional finance to carry out this plan. He is considering two options.
Option 1: Invite a friend, Khaled, to become a partner in the business. Khaled would introduce capital of $10 000.
Option 2: Apply for a bank loan of $10 000.
REQUIRED
(e) Advise Rafiq which option he should choose. Justify your answer by discussing both financial and non-financial issues of each option.
[7]
[Total: 30]
Mark scheme
1(a) Lack of expertise (1) 2
Content with information that minimal records provide (1)
Less time-consuming (1)
Less costly (1)
Max 2
Accept other valid responses.
1(b) Access to full information about assets, liabilities, capital, expenses and revenues (1) 4
More informed decision making (1)
Can provide detailed information to support loan application (1)
Easier to prepare financial statements/more reliable and accurate information about profits and losses (1)
Opportunity for more control over business activities (1)
Possibility of fraud reduced (1)
Better able to meet government requirements for information (e.g. tax returns) (1)
Enables analysis of performance (1)
Max 4
Accept other valid responses.
1(c) $ 3
Bank 93 100}
(1)
Discounts received 4 900}
98 000
Less decrease in balances (2 640) (1)
95 360 (1)OF
Alternative method:
Total Trade Payables account
$ $
Balance c/d 9 230} (1) both Balance b/d 11 870}
Bank 93 100 Purchases 95 360 (1)OF
(1)both
Discounts received 4 900
107 230 107 230
Balance b/d 9 230
} 1 mark for both opening balances b/d
1(d) Rafiq 14
Income statement for the year ended 31 December 2021
$ $
Revenue W1 157 600 (3)
Opening inventory 14 430}
Purchases 95 360 OF
Less goods own use (480) (1)
109 310
Closing inventory (11 920) } (1) both
Cost of sales 97 390
Gross profit 60 210 (1)OF
Add: discounts received 4 900 (1)OF
Profit on disposal of furniture and fittings 530 (1)
65 640
Less: expenses
Wages 21 540 (1)
Rent W2 14 560 (1)
General expenses 5 940
Depreciation of furniture and fittings W3 4 740 (3)
46 780
Profit for the year 18 860 (1)OF
1(d) W1 Revenue
$
Banked 132 200
Outstanding bankings 1 200 (1)
Wages 21 540
(1)all 3
Drawings 2 580
items
Increase in cash 80
157 600 (1)OF
W2 Rent: paid $14 750 + opening prepaid $1250 – closing prepaid $1440 = $14 560 (1)
W3 Depreciation of furniture and fittings
$
Opening valuation 22 710
Additions 8 000
(1)both
Installation costs 380
31 090
Disposal (2 950) (1)
28 140
Closing valuation (23 400)
4 740 (1)OF
1(e) Partner (Overall Max 3) 7
For: (Max 2)
May bring fresh ideas/particular business skills (1)
Will ease Rafiq’s workload (1)
Permanent source of capital (1)
Shared responsibility (1)
Against: (Max 2)
Will have to share profits (1)
May result in disagreements (1)
Control of business has to be shared slowing decision-making (1)
Loan (Overall Max 3)
For: (Max 2)
Rafiq remains in sole control of the business (1)
Profits are not shared (1)
Against: (Max 2)
Loan interest will reduce profits (1)
Liquidity will be affected by loan repayments and interest payments (1)
Will business be eligible for a loan/can Rafiq offer security for loan? (1)
Temporary source of finance (1)
Decision (1)
Accept other valid responses.
T Limited’s statement of financial position at 28 February 2021 included the following:
$
Equity
Issued capital: ordinary shares of $0.50 each 450 000
Share premium 122 000
Retained earnings 342 000
914 000
On 31 August 2021 the directors paid an interim dividend of $0.05 per share.
REQUIRED
(a) Calculate the amount paid as an interim dividend.
[1]
(b) Identify two factors which directors should take into account when deciding the amount of a dividend payment to shareholders.
1 ……
2 ……
[2]
Additional information
On 1 December 2021, the directors made a bonus issue on the basis of two ordinary shares for every three ordinary shares currently held. The directors wished to leave the reserves in their most flexible form.
REQUIRED
(c) Prepare the journal entry to record the bonus issue of shares. A narrative is not required.
Journal
Dr Cr
$ $
[3]
Additional information
On 28 February 2022, the directors paid a final dividend of $0.07 per share on all ordinary shares issued at this date.
The company’s profit for the year ended 28 February 2022 was $114 000.
REQUIRED
(d) Calculate the closing balance of the company’s retained earnings account at 28 February 2022.
[6]
(e) State three reasons why a company sometimes makes a rights issue of shares rather than a general issue of shares.
1 ……
2 ……
3 ……
[3]
[Total: 15]
Mark scheme
2(a) Number of shares 900 000 × $0.05 = $45 000 (1) 1
2(b) The amount of retained earnings / distributable reserves available for distribution (1) 2
The amount of cash available (1)
Other commitments affecting the amount of retained profit/cash (1)
Shareholder expectations (1)
Max 2
Accept other valid responses.
2(c) 3
Journal
Dr Cr
$ $
Share premium 122 000 (1)
Retained earnings 178 000 (1)
Issued share capital 300 000 (1)
2(d) Retained earnings at 28 February 2022 6
$
Balance b/d 342 000
Less interim dividend (45 000) (1)OF
Less bonus issue (178 000) (1)OF
Add: profit for the year 114 000 (1)
Less: final dividend W1 (105 000) (2)OF
Balance at 28 February 2022 128 000 (1)OF
W1 Final dividend: 1 500 000 (1) × $0.07 = $105 000 (1) OF
2(e) Avoid dilution of ownership (1) 3
Less expensive / faster to process (1)
More likely to be successful / fully subscribed as shares may be issued at a favourable price (1)
To increase equity share capital (1)
Max 3
Accept other valid responses.
Bipin, Feroz and Neeru have been in partnership for many years sharing profits and losses in the ratio 3 : 1 : 2 respectively.
Feroz decided to retire from the partnership with effect from 1 January 2022. On this date the statement of financial position was available.
Statement of financial position
$ $
Assets
Non-current assets at net book value 132 000
Current assets
Inventory 17 560
Trade receivables 10 540
Cash at bank 18 490
46 590
Total assets 178 590
Capital and liabilities
Capital accounts
Bipin 72 000
Feroz 44 300
Neeru 57 000
173 300
Current accounts
Bipin 4 240
Feroz (1 980)
Neeru (2 750)
(490)
Total capital 172 810
Current liabilities
Trade payables 5 780
Total capital and liabilities 178 590
The following information is also available.
1 Non-current assets were revalued at $155 000 and inventory was revalued at $13 160.
2 Goodwill was valued at $39 000. It was agreed that a goodwill account was not to be maintained in the books of the partnership.
3 Bipin and Neeru agreed to remain in partnership sharing profits and losses equally.
4 On his retirement, Feroz agreed to take a non-current asset at its valuation of $15 000. He agreed to leave the remaining amount due to him as a loan to the partnership.
REQUIRED
(a) Prepare, on the next page, the partners’ capital accounts to record the retirement of Feroz.
Capital accounts
Bipin Feroz Neeru Bipin Feroz Neeru
$ $ $ $ $ $
11
[7]
Additional information
Bipin and Neeru have agreed the following for the new partnership.
1 They will no longer use current accounts. Each partner’s current account balance is to be transferred to the partner’s capital account.
2 The opening balances of their capital accounts are to reflect their new profit and loss sharing ratio.
Neeru was to introduce or withdraw funds in order to achieve this.
REQUIRED
(b) Calculate the amount Neeru should introduce or withdraw.
[4]
(c) Explain one reason for valuing goodwill when a partner retires.
[2]
(d) State two reasons why it is usual not to maintain a goodwill account in the books of a partnership.
1 ……
2 ……
[2]
[Total: 15]
Mark scheme
3(a) 7
Capital accounts
Bipin Feroz Neeru Bipin Feroz Neeru
$ $ $ $ $ $
Goodwill 19 500 19 500} Balances 72 000 44 300 57 000
adjustment b/d
Current 1 980 (1) Revaluation 9 300 3 100 6 200 (1)
a/c W1
Non-
current
asset 15 000 (1)
Loan 36 920 (2)CF Goodwill 19 500 6 500 13 000} (1)
(1)OF adjustment
Balances 81 300 56 700
c/d
100 800 53 900 76 200 100 800 53 900 76 200
Balance b/d 81 300 56 700 (1)OF
W1 Revaluation surplus: Non-current assets + $23 000 – Inventory $4400 = $18 600
shared: Bipin $9300, Feroz $3100, Neeru $6200 (1)
3(b) Bipin Neeru 4
$ $
Capital account balances 81 300 56 700 (1)OF
Current account balances 4 240 (2 750) (1)
85 540 53 950
Neeru to introduce (1)OF 31 590 (1)OF
3(c) It will ensure retiring partner is rewarded (1) for his/her contribution to the success of the business (1). 2
3(d) The value of goodwill is subjective (1) 2
To apply the going concern concept (1)
Value may fluctuate (1)
Max 2
Accept other valid responses.
R Limited uses absorption costing at one of its factories. This factory has two production departments: Machining and Assembly, and two service departments: Support and Canteen.
Some budgeted overheads have already been apportioned for April 2022. The remaining budgeted overheads for April 2022 are as follows:
$
Depreciation of machinery 25 000
Production departments’ supervisor’s wages 19 800
The following additional information is available.
1
Production departments Service departments
Machining Assembly Support Canteen
Floor area (m2) 7000 2000 400 600
Power (Kwh) 4500 1800 300 900
Machinery cost ($) 850 000 110 000 15 000 25 000
Number of employees 75 35 8 7
2 The canteen provides meals for staff in the Machining, Assembly and Support departments.
3 The Support department’s overheads should be reapportioned on the basis of production departments’ machinery cost.
REQUIRED
(a) Complete the following table showing the apportionment of overheads and the reapportionment of service department overheads.
Production departments Service departments
Machining Assembly Support Canteen
$ $ $ $
Overheads already
106 350 28 600 7 180 13 870 apportioned
Depreciation of machinery
Production departments’ supervisor’s wages
Reapportioned Canteen
Reapportioned Support
Total
[5]
Additional information
Machining Assembly
Direct labour hours per month 3200 2400
Machine hours per month 5600 1800
REQUIRED
(b) Calculate the overhead absorption rate for each production department to two decimal places.
Machining
Assembly
[4]
(c) State two reasons why overheads may be under-absorbed.
1 ……
2 ……
[2]
Additional information
At another factory a single product is made. This factory uses marginal costing.
The following information is available.
$
Direct materials per unit 8.80
Direct labour per unit 10.10
Selling price per unit 27.00
Fixed costs per month $44 000
Production capacity per month 15 000 units
The factory has been operating at below its normal capacity. However, recently demand for the company’s product has increased considerably. The directors believe there is an opportunity to increase profits. They are considering two options to meet increased demand.
Option 1
1 Increase the selling price per unit by 5%.
2 Increase production to 16 000 units per month.
3 Overtime is paid at an additional $4.10 per unit.
4 Reduce monthly advertising by $2 000.
Option 2
1 Increase production capacity per month by 15% by purchasing additional machinery costing
$78 000. This machinery will be depreciated at 20% per annum.
2 Selling price will remain at $27 per unit.
3 The supplier of materials currently offers a trade discount of 20%. This will increase to 30%.
4 The additional machinery will be more efficient and production will not require any overtime working.
REQUIRED
(d) Calculate the monthly profit to be made for each option.
(i) Option 1
[5]
(ii) Option 2
[5]
Additional information
The cost of the additional machinery required in Option 2 would be financed by an issue of ordinary shares.
REQUIRED
(e) Advise the directors which option they should choose. Justify your answer by considering both financial and non-financial factors.
[5]
(f) (i) State two benefits of budgetary control.
1 ……
2 ……
[2]
(ii) State two limitations of budgetary control.
1 ……
2 ……
[2]
[Total: 30]
Mark scheme
4(a) 5
Production departments Service departments
Machining Assembly Support Canteen
$ $ $ $
Overheads
already 106 350 28 600 7 180 13 870
apportioned
Depreciation of
21 250 2 750 375 625 (1)
machinery
Production
departments’
13 500 6 300 (1)
supervisor’s
wages
141 100 37 650 7 555 14 495
Reapportioned
9 213 4 299 983 (14 495) (1) OF
canteen
150 313 41 949 8 538 –
Reapportioned
7 560 978 (8 538) (1) OF
Support
Total 157 873 42 927 – (1) OF
4(b) Machining department: 157 873/5 600 = $28.19 (1)OF per machine hour (1) 4
Assembly department: 42 927/2 400 = $17.89 (1)OF per direct labour hour (1)
4(c) Production lower than forecast (1) 2
Actual overheads higher than forecast (1)
4(d)(i) Option 1 5
$
Revenue ($28.35 × 16 000) 453 600 (1)
Direct materials ($8.80 × 16 000) (140 800) (1)
Direct labour; normal working ($10.10 × 15 000) (151 500) (1)
Direct labour: overtime working ($14.20 × 1000) (14 200)
Contribution 147 100
Fixed costs ($44 000 – $2000) (42 000) (1)
Profit 105 100 (1)OF
4(d)(ii) Option 2 5
$
Revenue ($27 × 17 250) 465 750 (1)
Direct materials ($7.70 × 17 250) (132 825) (1)
Direct labour ($10.10 × 17 250) (174 225) (1)
Contribution 158 700
Fixed costs ($44 000 + $1300 depreciation) (45 300) (1)
Profit 113 400 (1)OF
4(e) 5
Financial (max 3) Non-financial (max 3)
Produces less/more profit (1) Would training result in possible delay (1)
in production?
Possible low cost of finance (dividends (1) Will workforce need training on new (1)
optional)/shareholders will expect return machinery?
Will forecasts prove accurate? (1) Overtime may or may not be attractive (1)
to workforce
Would training costs apply (1) Higher selling price may reduce (1)
demand.
Will share issue be successful? (1)
Costs of share issue (1)
Overall max for comments (4)
Advice (1)
Accept other valid responses
4(f)(i) Employees can be provided with achievable targets / Can assist with motivation (1) 2
Budgetary control can facilitate responsibility accounting (1)
Helps planning/co-ordination/control/communication (1)
Max 2
Accept other valid responses.
4(f)(ii) A poorly set budget can demotivate (1) 2
Based on estimates not accurate (1)
Might encourage interdepartmental rivalry (1)
May discourage innovation (1)
Max 2
Accept other valid responses.
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