Accounting 9706/32 February/March 2023: question paper and mark scheme

Mark scheme

1(a) Explain two reasons why a business may apply a rate of factory profit. 4 The transfer price can benchmark with the price at which goods could be bought from external suppliers. (1) This provides relevant information to the business to make decision whether goods should be produced by the business or bought from external suppliers. (1) This allows responsibility accounting in the business. (1) The manufacturing department is treated as a profit centre so that costs can be controlled. (1) Max 2 for each reason ((1) mark for each identification up to a maximum of two plus one further mark for each explanation.) Accept other valid responses. 1(b) Prepare the provision for unrealised profit account for the year ended 31 December 2022. 2 Provision for unrealised profit $ $ Balance c/d 5 000 (1) Balance b/d W1 4 400 (1) Profit or loss 600 5 000 5 000 Balance b/d 5 000 W1 $26 400 × 20/120=$4400 1(c) Prepare the manufacturing account for the year ended 31 December 2022. 6 Manufacturing account for the year ended 31 December 2022 $ Direct materials consumed ($216 000 – $1 160) 214 840 (1) Direct labour ($196 200 – $3 000) 193 200 (1) Prime cost 408 040 Factory overheads ($85 000 + $3 000 – $1 000) 87 000 (1) 495 040 Decrease in work in progress inventory 960 (1) Cost of goods manufactured 496 000 Factory profit 99 200 (1)OF Transfer value 595 200 (1)OF 1(d) Prepare the statement of profit or loss or the year ended 31 December 2022. 8 Statement of profit or loss for the year ended 31 December 2022 $ Sales revenue 936 000 Cost of sales Finished goods opening inventory 26 400 Goods at transfer value 595 200 (1)OF Finished goods closing inventory ($5 000 OF × 120 / 20) (30 000) (1)OF 591 600 Gross profit 344 400 (1)OF Factory profit 99 200 }OF Increase in provision for unrealised profit (600) } (1) 443 000 Administrative expenses ($234 000 + $1 000) 235 000 (1) Distribution costs ($97 000 – $4 000) 93 000 (1) Profit from operations 115 000 Finance costs 4 000 (1) Profit for the year 111 000 (1)OF 1(e) Advise the sales manager whether or not J Limited should accept the sales order. Justify your answer and 5 support your answer with relevant calculations. Max 1 marks for agree comments Max 1 marks for disagree comments 1 mark for decision supported with comment Calculations (max 2) The effective gross profit margin is 47.33% ($443 000 / $936 000). (1)OF From the order, J Limited can get an increase in profit of ($40 000 × 47.33% – $9 500) =$9 432. (1)OF Agree ( max 1) J Limited will get an increase in profit (1) J Limited can have the opportunity to expand the business in a new market. (1) Disagree ( max 1) However, entering a new market may be risky, i.e. political reason, foreign currency issue (1) There may be an increase in other administrative costs (1) Accept other valid responses.

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2(a)(i) Calculate to two decimal places: 5 price/earnings ratio Dividend paid ($800 000 / $2) × $0.12 = $48 000 (1) Profit for the year $24 000 + $48 000 = $72 000 (1)OF Earnings per share $72 000 / ($800 000/$2) = $0.18 (1)OF Price/earnings ratio = $3.35/$0.18 (1)OF = 18.61 (1)OF 2(a)(ii) Calculate to two decimal places: 1 dividend yield $0.12/$3.35 = 3.58% (1) 2(a)(iii) Calculate to two decimal places: 3 gearing ratio ($100 000 / $1 054 000) (1) OF = 9.49% (1) OF $800 000 + $60 000 + $70 000 + $24 000 + $100 000 = $1 054 000 (1) 2(a)(iv) Calculate to two decimal places: 3 return on capital employed ($72 000 + $2 500) / $1054 000 (1) OF = 7.07% (1) OF $100 000 × 5% × 6 / 12 = $2 500 (1) 2(b)(i) Analyse the performance of X plc, comparing the results with the industry average in respect of: 4 price/ earnings ratio X plc has a better PE ratio (18.61) than the industry average (16). (1) This would indicate that the investors have more confidence in the company. (1) It may indicate that the share price of X plc has been overvalued compared to the share price of other companies. (1) It also means that investors are willing to pay a higher share price in the expectation of future earnings growth. (1) Accept other valid responses. Accept OF comments. 2(b)(ii) Analyse the performance of X plc, comparing the results with the industry average in respect of: 4 gearing ratio X plc has a lower gearing ratio (9.49%) than the industry average (25%). (1) A low-geared business is perceived as low risk. (1) Low gearing also means that low fixed interest is paid. (1) More residual profit available for distribution. (1) Max 4 Accept other valid responses. Accept OF comments 2(c) Advise whether or not the directors should propose a final dividend for 2022. Justify your answer. 5 Max 2 marks for agree comments Max 2 marks for disagree comments 1 mark for decision supported with comment Agree to propose dividend (max 2) • To fulfil the expectation of shareholders (1) • The dividend yield, 3.58%, is lower than the debenture interest (1), the return of shareholders is inferior to outsiders (1) • To reinforce the share price (1) Disagree (max 2) • Business is short of cash to pay dividend (1) • Business is still at an early stage, it should keep more cash for future development (1) • A higher price/earnings ratio suggests that the business is expected to be a growth prospect (1), shareholders should forgo the short-term gain in exchange for a future long-term gain. (1) Accept OF comments Accept other valid responses

Mark scheme

3(a)(i) Explain, with reference to the relevant International Accounting Standards, the appropriate accounting treatments 5 for the items in: information 4 (Support your answer with calculations.) IAS 36 Impairment of assets (1) Recoverable amount is the higher of fair value less costs to sell ($24 500 – $1 800 = $22 700) and value in use ($23 200). (1) Impairment loss $3 800, (1) which is the amount of carrying value ($27 000) exceeding the recoverable amount ($23 200), should be recognised in the statement of profit or loss (1) and the carrying value is reduced accordingly. (1) 3(a)(ii) Explain, with reference to the relevant International Accounting Standards, the appropriate accounting treatments 4 for the items in: information 5. IAS 37 Provisions, contingent liabilities and contingent assets. (1) The incident occurring in December 2022 is a past event. (1) On the basis of the legal advice that T Limited is probably liable for the compensation, it is a liability. (1) A provision for $9 000 should be made for the year ended 31 December 2022. (1) 3(b) Prepare a statement showing the adjusted retained earnings at 31 December 2022. 6 $ Draft retained earnings 86 000 Proposed dividend 20 000 (1) Repairing $8000 × 6 / 48 (1 000) } Depreciation overcharged $8 000 × 20% 1 600 }(1) Revaluation loss 35 000 (1) Impairment loss (3 800) (1)OF Provision for compensation (9 000) (1) Adjusted retained earnings 128 800 (1) OF 3(c) Prepare an adjusted statement of financial position at 31 December 2022. 7 Statement of financial position at 31 December 2022 $ Non-current assets Property, plant and equipment W1 414 800 (3) Current assets Inventories 42 000 Trade receivables 225 000 Other receivables ($6000+$7000) 13 000 (1) Cash and cash equivalents 74 000 354 000 Total assets 768 800 Equity Ordinary share capital ($1 shares) 400 000 Share premium 35 000 Revaluation reserve ($60 000-$35 000) 25 000 (1) Retained earnings 128 800 588 800 Current liabilities Trade payables 152 000 Other payables W2 28 000 (2) 180 000 Total equity and liabilities 768 800 W1: ($425 000 – $8 000(1) + $1 600(1) – $3 800(1)OF) W2: ($39 000 – $20 000(1) + $9 000(1)) 3(d) State three responsibilities of an external auditor. 3 To examine the books and accounts (1) To ensure the financial statements comply with legal requirements and accounting standards (1) To verify the value and existence of assets and liabilities (1) To carry out audit tests (1) To prepare an audit report on whether the financial statements give a true and fair view (1) Max 3 Accept other valid responses.