Accounting 9706/32 February/March 2025: question paper and mark scheme

Mark scheme

1(a)(i) State how a business creates a general reserve. 1 General reserve is created by transferring profit from profit for the year/retained earnings. (1) 1(a)(ii) Explain why a business would create a general reserve. 2 To retain profits within the business (1) as an alternative to paying dividends to the shareholders (1) It may be used to purchase non-current assets / for expansion (1) without borrowing. (1) The sum is kept to meet future operating loss (1) as a provision for emergencies (1) Max 2 Accept other valid responses. 1 b(i) Prepare for the year ended 31 December 2024: 5 a statement to show the profit from operations $ Balance at 1 January 2024 245 800 Transfer to general reserve (30 000) (1) Issue of bonus shares ($100 000 – $80 000) (20 000) (1) Payment of final dividend ($300 000 × $0.11) (33 000) } Payment of interim dividend ($400 000 × $0.06) (24 000) }(1) Profit for the year (balancing) 68 200 Balance at 31 December 2024 207 000 Profit for the year 68 200 Finance costs ($3 600 + $3 200) 6 800 (1) Profit from operations 75 000 (1)OF 1(b)(ii) Prepare for the year ended 31 December 2024: 12 the statement of cash flows in accordance with IAS7. Statement of cash flows for year ended 31 December 2024 $ $ Cash flows from operating activities Profit from operations 75 000 Depreciation: Office premises ($320 000 + $120 000 – $418 000) 22 000 (1) Office equipment ($235 000 + $25 000 – $8 400 – $214 000) 37 600 (1) Motor vehicles ($116 000/80%) × 20% 29 000 (1) 88 600 Loss on disposal 3 500 } Increase in inventories (34 000) } Decrease in trade receivables 10 000 } Increase in trade payables 23 000 }(1) Cash from operations 166 100 Interest paid ($60 000 × 12% + $80 000 × 8%) × 6/12 (6 800) (1) Net cash from operating activities 159 300 Cash flows from investing activities Purchase of office equipment ($25 000 – ($8 400 – $3 500)) (20 100) (1) Purchase of motor vehicles ($116 000/80%) (145 000) (1) Net cash used in investing activities (165 100) (1)OF Cash flows from financing activities Issue of 8% debenture 80 000 } Repayment of 12% debenture (60 000) }(1) Dividend paid – final dividend (33 000) } – interim dividend (24 000) }(1)OF Net cash used in financing activities (37 000) (1)OF Net decrease in cash and cash equivalents (42 800) (1) Cash and cash equivalents at 1 January 2024 4 800 Cash and cash equivalents at 31 December 2024 (38 000) 1(c) Advise whether or not CF Limited has made a good decision to take over the delivery services. Justify your 5 answer. Good decision (max 2) In-house costs should be lower as no profit for contractors (1) Provide better service (on time / speedy) to the customers (1) No need to renew service contract with the transportation company (1) Bad decision (max 2) Negative impact on the cash flows (1) Need additional finance / interest may have to be paid (1) Incur additional expenses such as salaries for drivers and depreciation (1) Decision supported with a comment (1) Accept other valid responses.

Mark scheme

2(a) State three differences between goodwill and a tangible asset. 3 Goodwill Tangible asset No physical existence Has physical existence (1) Cannot be sold separately Can be sold separately (1) The value tends to be subjective The value tends to be objective (1) Max 3 Accept other valid responses. 2(b) Calculate the purchase consideration payable by W Limited. 3 $ Total value of assets taken over 402 000 (1) Goodwill W1 123 000 (1) Purchase consideration 525 000 (1)OF W1 ($37 100 + $41 300 + $44 600)/3 = $41 000 $41 000 × 3 = $123 000 2(c) Complete the capital accounts of Ada and Brian, showing the final settlement with the partnership’s cash at bank 8 account. Ada Brian Ada Brian $ $ $ $ Current account 10 000 } Balance b/d 200 000 150 000 W Limited 315 000 }} 210 000 }}(1)OF Current account 5 000 }(1) Profit on realisation W1 70 800 (1)OF 47 200 (1)OF Bank 54 200 (1)OF 7 800 (1)OF 325 000 210 000 325 000 210 000 W1 $ Consideration 525 000 OF Carrying value of assets taken over 408 000 (1) 117 000 Discount on trade payables 1 000 (1) Profit on realisation 118 000 2(d) Prepare the journal entry of W Limited to record the acquisition of the partnership business. 2 Dr Cr $ $ Equipment 174 000 } Motor vehicles 48 000 } Inventory 89 000 } Trade receivables 91 000 } Goodwill 123 000 }(1) Ordinary shares 300 000 } Share premium 225 000 }(1)OF 2(e) Explain why W Limited did not accept the initial request for five times the average profit. Support your answer with 4 relevant calculations. W Limited can pay less purchase consideration / issue fewer shares to acquire the partnership business. (1) The future profit is only estimated on the basis of the profits of past years. (1) The partnership’s financial statements have not been audited. (1) It is difficult to estimate whether the partnership’s profit can sustain at its current level for the coming 5 years as propo sed by Ada and Brian (1) There are uncertainties in the future, such as economic outlook, trend, demand, technology and political issues. (1) The profit of the partnership is in the declining trend in the last 3 years. (1) Goodwill = 2 × $41 000 = $82 000 (1) Goodwill = 5 × $41 000 = $205 000 (1) Max 2 marks for calculations. Max 2 marks for comments Accept other valid responses. 2(f) Evaluate whether or not Ada and Brian made the right decision to choose option 1. Justify your answer. 5 They are only minor shareholders and cannot make any decision (1) Given that the value of each share has a premium of $0.75, this implies that the prospect of W Limited is promising (1) They can enjoy dividend / increase in share value (1) They may not receive dividend / share value may fall (1) They can use the cash for any other purposes (1) After running the partnership business for thirty years, it is better for them to keep cash for their retiring life. (1) It may be difficult for Ada and Brian to realise their shareholdings. (1) Max 4 Decision supported with a comment (1) Accept other valid responses.

Mark scheme

3(a) State three limitations of using ratios to evaluate the performance of a business. 3 The value of many non-current assets is based on historical cost instead of current value. (1) Ratios are based on past events. (1) Financial statements only show the monetary value. (1) Information may not be accurate. (1) Ratios only show the results without referring to the causes of the results. (1) The financial statements are only prepared on a particular date. (1) Different businesses have different accounting policies. (1) Max 3 Accept other valid responses. 3(b)(i) Calculate, to two decimal places, the following ratios for the year ended 31 December 2024: 4 dividend yield Dividend per share ($60 000 × 110% (1) +$35 000)/500 000 $0.202 (1)OF ($0.202 / $2.85) × 100 (1)OF for correct formula 7.09% (1)OF 3(b)(ii) price/earnings (PE) 3 Earnings per share $190 000/500 000 $0.38 (1) $2.85/$0.38 (1)OF for correct formula 7.50 (1)OF 3(b)(iii) gearing ratio 2 [$200 000/($672 000+$200 000)] x 100 (1) for correct formula 22.94% (1) 3(c) Calculate the working capital cycle (round up each component to the next whole day). 4 Days Inventory turnover ($56 000 + $78 000)/2 = $67 000 ($67 000/$548 000) × 365 45 (1) Trade receivables turnover ($110 000/$988 000) × 365 41 (1) 86 Trade payables turnover ($54 500/$570 000) × 365 35 (1) 51 (1)OF 3(d) Discuss the performance of B plc in managing its working capital cycle as compared with X plc. 5 As B plc has a longer working capital cycle so it appears that B plc performs less well than X plc (1) because the business needs more funds to finance the working capital. (1) B plc holds inventory for a longer period (1) / allows longer credit period to its customers (1) / repays suppliers faster (1) Max 5 Accept other valid responses. 3(e) Discuss the performance of B plc as measured by its PE ratio as compared with X plc. 4 B plc’s share price in relation to X plc may be lower (1) and the earnings per share may be higher (1) B plc has a lower PE ratio than X plc which is not good for the business (1) and it appears that the investors have less confidence in B plc than in X plc. (1) Max 4 Accept other valid responses.