Accounting 9706/32 February/March 2024: question paper and mark scheme

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1(a) Prepare, showing the adjustments made during the acquisition on 1 January 2024, the capital accounts of Ada and 11 Brian. Show the final settlement to or from each partner. Capital account Ada Brian Ada Brian $ $ $ $ Current account 3 900 } 7 800 }(1) Balance b/d W1 160 000 160 000 (4) row Profit on realisation X Limited 180 000 } 180 000 }(1) W2 25 850 25 850 (3) row Brian 1 950 (1)OF Ada 1 950 (1)OF 185 850 187 800 185 850 187 800 W1 W2 $ $ Non-current assets 230 000 Purchase consideration 360 000 Inventory 52 000 Book value of net assets (308 300) Trade receivables 72 000 Profit on realisation 51 700 (1) Cash and cash equivalents 18 300 Trade payables (64 000) Ada 25 850 (1)OF Net assets 308 300 (1) Brian 25 850 (1)OF Current account 51 700 Ada 3 900 } Brian 7 800 }(1) Total capital account 320 000 Ada’s capital account 160 000 (1)OF Brian’s capital account 160 000 (1)OF 1(b) Prepare the statement of financial position of X Limited at 1 January 2024. 7 X Limited Statement of financial position at 1 January 2024 $ $ Non-current assets Goodwill W1 43 200 (1) Equipment 241 500 (1) 284 700 Current assets Inventory 50 440 (1) Trade receivables 70 560 (1) Cash and cash equivalents ($18 300+$40 000) 58 300 (1) 179 300 Total assets 464 000 Equity and liabilities Ordinary shares capital 400 000 (1) Current liabilities Trade payables 64 000 (1) Total equity and liabilities 464 000 W1 $ Equipment 241 500 $230 000 × 105% Inventory 50 440 $52 000 × 97% Trade receivables 70 560 $72 000 × 98% Cash 18 300 Trade payables (64 000) 316 800 Consideration 360 000 Goodwill 43 200 1(c) Calculate the amount of debenture to be issued in Option 1. 2 $320 000 × 6% = $19 200 (1)OF $19 200/4% = $480 000 (1)OF 1(d) Advise the directors which option they should choose. Justify your answer. 5 Option 1 – max (2) If the return of investment exceeds 4%, the shareholders of X Limited will benefit (1). High gearing ratio is perceived risky (1). Debenture interest is a financial charge that reduces profit (1). May require security (1). Option 2 – max (2) Calvin will take control of X Limited (480 000 shares vs 400 000 shares) / Ada and Brian may lose management control (1). Calvin may contribute his knowledge and experience to the project (1). Dividend may have to be paid to Calvin (1). Decision supported by a comment (1) Accept other valid responses.

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2(a) Explain one reason why the information in the statement of cash flows of a business is important to its 2 shareholders The business has enough cash to conduct its operations (1) so that the business can generate profit to provide returns to the shareholders (1). The business has enough cash to pay its obligations (1) so that the business will not go bankrupt which will result in the shareholders losing their investments in the business (1). It shows how the constituent activities of the business each contribute to the net cash movement (1) so the shareholders can consider whether to continue with their investment (1) Max 2 Accept other valid responses. 2(b) Calculate the profit for the year for 2023. 3 $ Retained earnings c/d ($25 100 + $9 600) 34 700 Retained earnings b/d (25 100) (1both) Dividend paid 22 000 (1) Profit for the year 31 600 (1)OF 2(c) Prepare the statement of cash flows for the year ended 31 December 2023 in accordance with IAS7. 14 Statement of cash flows for the year ended 31 December 2023 $ $ Operating activities Profit from operations W1 33 800 (3) Loss on disposal of office equipment (9 000-6 200) 2 800 (1) Depreciation W2 28 800 (2) Decrease in inventory 2 000 } Increase in trade receivables (7 000) } Decrease in trade payables (1 500) }(1) Cash from operations 58 900 Interest paid (1 600) (1) Net cash from operating activities 57 300 (1OF) Investing activities Purchase of office equipment (48 000) (1) Sale proceeds of office equipment 6 200 Net cash used in investing activities (41 800) (1OF) Financing activities Issue of ordinary shares 25 000 } Receipts from 8% loan 10 000 }(1) Dividend paid (22 000) (1) Net cash from financing activities 13 000 (1OF) Increase in cash and cash equivalents 28 500 Cash and cash equivalents at the start of the year 38 900 Cash and cash equivalents at the end of the year 67 400 2(c) W1 $ Profit for the year 31 600 OF Add : Loan interest * 2 200 (2) Profit from operations 33 800 (1OF) * $ Accrued interest c/d ($800+$600) 1400 Accrued interest b/d (800) (1both) Bank – interest paid 1 600 Charge for the year 2 200 (1) W2 Cost of office equipment sold $9 000÷60%= $15 000 Provision for depreciation $15 000 × 20% × 2 = $6 000 Provision for depreciation Disposal 6 000 (1) Bal b/d 195 000 Bal c/d 217 800 Charge 28 800 (1) 223 800 223 800 2(d) Analyse the changes in the cash position of K plc during the year 2023. 6 K plc generates positive net cash from operations (1). This suggests that the company can maintain the operating capability (1). K plc raised more finance from issuing new shares / loan (1). The further loan resulted in higher finance charges (1). Net cash from operations, together with further loan and further issuing of shares, enables K plc to pay dividend (1), pay interest (1) and make new investment in buying non-current assets (1). There is a net increase in cash and cash equivalents at the year-end (1). K plc has a good liquidity/cash position in 2023 (1). Max 6 for comments Accept other valid responses.

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3(a) Prepare the manufacturing account for the year ended 31 December 2023. 5 Manufacturing account for the year ended 31 December 2023 $ Direct materials opening inventory 46 000 Purchases 133 000 Carriage inwards 6 900 Direct materials closing inventory (36 200) Cost of direct materials consumed 149 700 (1) Direct wages 148 000 Prime cost 297 700 (1)OF Manufacturing expenses 45 400 Depreciation - machinery 17 700 (1) 360 800 Work in progress opening inventory 21 000 Work in progress closing inventory (25 800) Cost of goods manufactured 356 000 (1)OF Factory profit 20% 71 200 Transfer price 427 200 (1)OF 3(b)(i) Prepare a statement to calculate, showing clearly the cost of sales, how much of this amount was derived from: 3 (i) importing Imported goods $ $ Sales revenue 378 400 Cost of sales Finished goods opening inventory 36 000 Purchases 226 000 Carriage inwards 4 200 (1) Finished goods closing inventory (39 600) 226 600 (1OF) Profit from importing 151 800 (1OF) 3(b)(ii) Prepare a statement to calculate, showing clearly the cost of sales, how much of this amount was derived from: 5 (ii) manufacturing $ $ Manufactured goods Sales revenue 498 000 Cost of sales Finished goods opening inventory 56 400 Transfer value of goods manufactured 427 200 (1OF) Finished goods closing inventory (51 600) 432 000 (1OF) 66 000 Factory profit 71 200 (1OF) Decrease in provision for unrealised profit W1 800 (1) 72 000 Profit from manufacturing 138 000 (1OF) W1 ($56 400 – $51 600) × 20 / 120 = $800 3(c) Calculate the profit for the year ended 31 December 2023. 2 $ Profit excluding expenses 289 800 Office expenses (204 000) Depreciation of office equipment (7 500) (1) Profit for the year 78 300 (1)OF 3(d) Explain the impact on the profit for the year for 2023 of increasing the rate of factory profit to 25% in 2023. 5 Profit from manufacturing and expenses are unaffected by the change (1) The transfer price will increase (1) The factory profit will increase by an equal amount (1) The value of finished goods inventory will increase (1) The balance on the provision for unrealised profit will increase (1) These changes compensate for one another and there is no impact on the profit for the year for 2023. (1) Max 5 3(e) Advise the directors whether or not they should manufacture home appliances for the high -income customers to 5 maintain the profits. Justify your answer. For (max 2) G Limited manufacturing home appliances for both the high-income and low-income customers will become a wholly manufacturing business. The synergy can improve the productivity and efficiency and keep costs and prices low. (1) G Limited has experience of manufacturing home appliances and will not incur start-up costs (1) The high-income customers may buy the manufactured appliances and this will maintain G Limited’s profits. (1) G Limited can control the quality of the products to reduce sales returns. (1) Against (max 2) Additional capital (1) will be needed to purchase additional machines and to expand the production capacity. (1) G Limited may need to take a loan and pay interest cost (1) G Limited may need to incur advertising expenditure to attract the high-income customers. (1) New skilled workers need to be employed at higher wages/ existing workers need training. (1) Decision supported by a comment (1) Accept other valid responses.