Accounting 9706/21 May/June 2019: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Structured Questions, May/June 2019. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Ahmed and Raji are in partnership as retailers but have not maintained full accounting records.
They have been advised to use a double entry system of book-keeping.
REQUIRED
(a) State three advantages to business owners of using the double entry system of book-keeping.
1
2
3
[3]
Additional information
The following information is available for the partnership:
1 Assets and liabilities
30 April 2019 1 May 2018
$ $
Equipment at net book value 17 600 20 500
Motor vehicles at net book value
(Cost $25 000 at 1 May 2018) ? 16 500
Inventory 5 470 6 750
Trade receivables 3 790 3 260
Trade payables 4 560 4 390
Wages owing 2 300 1 500
Rent paid in advance 1 600 950
Cash and bank balances 6 470 credit 5 430 debit
2 The summary of the partnership bank receipts and payments for the year ended 30 April 2019 was as follows.
$
Receipts
From credit customers 57 900
Payments
To credit suppliers 25 800
New motor vehicle 6 800
Partners’ drawings 16 700
Wages 10 700
Rent 7 500
General expenses 2 300
All purchases and sales were made on credit.
3 The partners wish to create a provision for doubtful debts of 5% of trade receivables.
4 Depreciation on the motor vehicles is charged at 20% using the straight-line method.
Depreciation is charged on a monthly basis.
5 On 1 November 2018 a motor vehicle which had cost $7000 on 1 May 2016 was part-exchanged for a new motor vehicle. The amount of the part-exchange was $3300. The balance of the purchase cost of the new vehicle, $6800, was paid by cheque.
6 There were no additions or disposals of equipment during the year.
REQUIRED
(b) Calculate:
(i) the profit or loss on the disposal of the motor vehicle
[3]
(ii) the total depreciation charge for motor vehicles for the year ended 30 April 2019.
[4]
(c) Prepare the income statement for the partnership for the year ended 30 April 2019.
[9]
(d) Explain why a business may create a provision for doubtful debts.
[4]
Additional information
When the partners started the business they each invested $25 000 and agreed to share profits and losses equally.
The partners are concerned that the business has low profit and a high bank overdraft. Ahmed’s brother is prepared to invest $25 000 into the business.
He has suggested two options to Ahmed and Raji.
Option 1: To loan this amount to the partnership and receive an annual interest of 10%.
Option 2: To invest the full amount and become an equal partner. Through his business contacts he feels that he will be able to improve the total revenue.
REQUIRED
(e) Advise the partners which option, if either, they should accept. Justify your answer.
[7]
[Total: 30]
PLEASE TURN OVER
Mark scheme
1(a) It will have up-to-date information of assets and liabilities / and will inform decision making (1) 3
The business can more easily chase trade receivables and keep up to date with trade payables (1)
The preparation of the financial statements is easier and more accurate / reducing the possibility of errors (1)
Accept other valid points.
1(b)(i) $ 3
$7000 − 2800 4200 (1)
Depreciation for 6 months (700) (1)
Net book value on disposal 3500
Part-exchange 3300
Loss on disposal (200) (1)
1(b)(ii) Total depreciation charge for motor vehicles for the year ended 30 April 2019 4
$
Depreciation on vehicles disposed 700 (1) OF
New vehicle 10 100 × 10% 1010 (1)
Remaining vehicles 18 000 × 20% 3600 (1)
Charge for the year 5310 (1) OF
1(c) Income statement for the year ended 30 April 2019 9
$ $
Revenue W1 58 430 (1)
Inventory on 1 May 2018 6 750
Purchases W2 25 970
32 720
Inventory on 30 April 2019 5 470 27 250 (1)
Gross profit 31 180
Wages W3 11 500 (1)
Rent W4 6 850 (1)
General expenses 2 300
Provision for doubtful debts 190 (1)
Loss on sale of motor vehicle 200 (1) OF
Depreciation on motor vehicles 5 310 (1) OF
Depreciation on equipment W5 2 900 (1) 29 250
Profit for the year 1 930 (1) OF
Workings: W1 Revenue 57 900 + 3790 − 3260 = 58 430
W2 Purchases 25 800 + 4560 − 4390 = 25 970
W3 Wages 10 700 + 2300 − 1500 = 11 500
W4 Rent 7500 − 1600 + 950 = 6850
W5 Depreciation equipment 20 500 − 17 600 = 2900
1(d) Application of concept of prudence (1) 4
Application of matching concept (1)
Profit may be overstated in the event of irrecoverable debts (1)
Trade receivables / current assets may be overstated (1)
Accept other valid points.
1(e) Loan Max 3 7
Annual interest will reduce / eliminate profit (1)
Does he want any security? (1)
Will he want capital repaid? (1)
However, it will clear the overdraft in the short-term. (1)
Accept other valid points.
Becoming a partner Max 3
Will bring in expertise / new ideas (1)
May generate additional gross profit (1)
May be able to reduce wages which is the main expense (1)
There may be conflict between the three partners (1)
Possibly less profit for Ahmed and Raji (1)
Accept other valid points.
1 for Advice
Lawrence provided the following information at 30 November 2018.
$
Purchases ledger control account balance 16 970
Sales ledger control account balance 42 350
These did not agree with the list of balances taken from the purchases ledger and sales ledger respectively. The following items were discovered:
1 A discount received of $280 had been omitted from the books.
2 A credit note for a sales returns of $230 had been treated as a sales invoice and entered in the sales journal.
3 An irrecoverable debt of $190 had been written off in the sales ledger. No entry had been made in the control account.
4 A contra entry for $1070 had been debited twice in the purchases ledger control account.
5 A payment of $120 to a credit supplier had not been recorded.
6 Discount allowed of $70 had been posted to the debit side of both the sales ledger control account and the purchases ledger control account.
7 Lawrence owes Kalim $380 and Kalim owes Lawrence $1590. They have agreed to set off the balance, on Lawrence’s account in Kalim’s sales ledger.
8 A customer’s dishonoured cheque had been entered in the cash book as $1560 instead of
$1650.
REQUIRED
(a) (i) Prepare the corrected purchases ledger control account at 30 November 2018.
$ $
Balance b/d 16 970
[4]
(ii) Prepare the corrected sales ledger control account at 30 November 2018.
$ $
Balance b/d 42 350
[5]
(b) Explain what is meant by the term ‘error of commission’.
[2]
(c) Explain the effect on a business of not updating:
(i) customers’ accounts in the sales ledger
[2]
(ii) suppliers’ accounts in the purchases ledger.
[2]
[Total: 15]
PLEASE TURN OVER
Mark scheme
2(a)(i) Lawrence 4
Corrected purchases ledger control account
$ $
Discount received 280 (1) Balance b/d 16 970
Cash payment 120 (1) Contra 1 070 (1)
Contra 380 Discount allowed 70 (1)
Corrected balance c/d 17 330
18 110 18 110
Balance b/d 17 330
2(a)(ii) Lawrence 5
Corrected sales ledger control account
$ $
Balance b/d 42 350 Sales return 460 (1)
Dishonoured cheque 90 (1) Irrecoverable debt 190 (1)
Discount 140 (1)
Contra 380 (1)
Corrected balance c/d 41 270
42 440 42 440
Balance b/d 41 270
2(b) A transaction recorded in the wrong account of the same class (1) but using the correct amount and on the correct side. (1) 2
2(c)(i) Incorrect sales ledger balances could mean Lawrence not collecting the right amount from credit customers. (1) It may also 2
risk resulting in irrecoverable debts. (1)
Non-collection of debts would negatively impact cash balances. (1)
May lead to incorrect financial statements (1)
Max 2
Accept other valid points.
2(c)(ii) Incorrect purchase ledger balances could mean possible disputes with suppliers affecting deliveries (1) and may result in 2
credit facilities being withdrawn. (1)
May lead to overpaying suppliers (1)
May result in loss of opportunities of settlement discount. (1)
Max 2
Accept other valid points.
K Limited prepares annual accounts to 30 September. For the year ended 30 September 2018, the directors have calculated profit from operations of $44 500. On 31 January 2018 they redeemed a 6% debenture of $100 000 together with accrued interest to that date.
REQUIRED
(a) Calculate the profit for the year ended 30 September 2018.
[2]
Additional information
The directors have provided the following extract from the statement of financial position at
1 October 2017.
Equity $
Ordinary shares of $0.25 each 500 000
Share premium 175 000
Retained earnings 540 000
1 215 000
The following information is also available:
1 On 31 December 2017, a rights issue of ordinary shares was made at a premium of
$0.15 per share on the basis of 2 ordinary shares for every 5 held on that date. The issue was fully subscribed.
2 On 31 March 2018, a bonus issue was made on the basis of 3 ordinary shares for every
5 held on that date. Reserves were maintained in the most flexible form.
3 On 30 June 2018, an interim dividend of $0.05 per share was paid on all shares in issue on that date.
4 On 30 September 2018, buildings were revalued at $1 200 000. The original cost of the buildings was $1 000 000 and had been depreciated by $150 000.
REQUIRED
(b) Prepare the statement of changes in equity for the year ended 30 September 2018.
Ordinary Share Revaluation Retained shares premium reserve earnings
$ $ $ $
At 1 October 2017 500 000 175 000 – 540 000
Workings:
[11]
(c) State one difference between a capital reserve and a revenue reserve.
[2]
[Total: 15]
Mark scheme
3(a) $44 500 – $2000 (1) = $42 500 (1) OF 2
3(b) Statement of Changes in Equity for the year ended 30 September 2018 11
Ordinary Share Revaluation Retained
shares premium reserve earnings
$ $ $ $
At 1 October 2017 500 000 175 000 540 000
Profit for the year 42 500 (1) OF
Rights issue W1 200 000 } 120 000 } (3)
Bonus issue W2 420 000 (1) (295 000) (1) (125 000) (1)
Dividends paid W3 (224 000) (2)
Revaluation of buildings 350 000 (1)
At 30 September 2018 1 120 000 0 350 000 233 500 (1) OF
3(b) 2 000 000 (1)
W1 Rights issue: 500 000 × 4 = = 800 000 (1) OF
5×2
800 000 × 0.25 = 200 000 } (1) OF both
800 000 × 0.15 = 120 000 }
W2 Bonus issue: 2 000 000 + 800 000 = 2 800 000
2 800 000
= 1 680 000 (1) OF
5×3
1 680 000 × 0.25 = 420 000 (1) OF
W3 Dividends paid: 2 000 000 + 800 000 + 1 680 000 = 4 480 000
4 480 000 × 0.05 = 224 000 (1) OF
3(c) Capital reserves: 2
Non distributable
Cannot be used to pay dividends
Created via changes in capital structure / non-trading activities
Max 1
Accept other valid points.
Revenue reserves:
Distributable
Can be used to pay dividends
Created via trading activities
Max 1
Accept other valid points.
Ravi manufactures two products, Exe and Wye. Each product has allocated fixed costs. The following chart shows budgeted information for Exe.
90
Sales revenue
80
70
Total costs
60
50
$000
40
30
Variable costs
20
10
0
0 10 20 30 40 50 60
Units (in thousands)
REQUIRED
(a) Identify the following values in dollars from the chart:
(i) Break-even point
[1]
(ii) Allocated fixed costs
[1]
(iii) Margin of safety
[1]
(iv) Profit
[1]
Additional information
The following budgeted information is available for Wye:
Sales (units) 105 000
$
Sales revenue 315 000
Direct labour 0.5 hours × $4 per hour 210 000
Direct materials 0.25 kilos × $2 per kilo 52 500
Allocated fixed costs 34 500
Ravi is concerned that the budgeted profit for Wye is not very high. He believes the following changes could increase the profit but will have no effect on sales volume.
1 Increase the selling price per unit by 5%.
2 Use skilled labour which will increase the cost per hour by 5%.
3 Use better quality material which will increase the cost per kilo by 2%.
4 Increase the advertising cost by $6000.
5 Offer the sales team a bonus of 2% of the sales revenue earned from all sales above 80 000 units.
REQUIRED
(b) Calculate, for product Wye only, the effect of these changes on the budgeted total profit for
105 000 units.
[10]
(c) Calculate, for product Wye only, the effect of these changes on the budgeted break-even point in dollars.
[5]
(d) Calculate, for product Wye only, the effect of these changes on the budgeted margin of safety in units.
[2]
(e) Recommend whether or not Ravi should proceed with these changes. Justify your answer.
[5]
(f) State four advantages to a business of planning for the future.
1
2
3
4
[4]
[Total: 30]
Mark scheme
4(a)(i) $60 000 (1) 1
4(a)(ii) $40 000 (1) 1
4(a)(iii) $30 000 (1) 1
4(a)(iv) $20 000 (1) 1
Workings:
{ 90
{ Sales revenue
{ 80 (iv)
(iii) {
{ 70
{ Total costs
(i)
{ 60
50
$000 (ii) Fixed costs
40
30 Variable costs
20
10
0
0 10 20 30 40 50 60
Units (in thousands)
4(b) Budgeted profit 10
Budgeted units 105 000
$
Sales revenue 315 000
Less direct labour 210 000
Less direct materials 52 500
Contribution 52 500
Less allocated fixed costs 34 500
Budgeted profit 18 000 (1)
Profit with changes
$ per unit or $
Selling price $3 × 1.05 = 3.15 (1) × 105 000 units 330 750
Less direct labour $4 ×1.05 = $4.20 × 0.5 hour = 2.10 (1) × 105 000 units 220 500
Less direct materials $2 × 1.02 = $2.04 × 0.25 kilos = 0.51 (1) × 105 000 units 53 550
Contribution 0.54 56 700
Alternate working for contribution per unit
$
Selling price $315 000
= $3.00 × 1.05 3.15
105 000
Less direct labour $210 000
= $2 × 1.05 2.10
105 000
Less direct material $52 500
= $0.5 × 1.02 0.51
105 000
Contribution per unit 0.54
$
Total contribution $0.54 × 105 000 units = 56 700 (1) OF
Less sales bonus 1 575 * see working
Less allocated fixed costs $34 500 + 6000 = 40 500 (1)
14 625 (1) OF
* sales bonus 105 000 – 80 000 = 25 000 units × $3.15 = $78 750 (1) OF × 2% = $1575 (1) OF
Budgeted profit = $18 000 New profit = − $14 625 Change = $3375 decrease (1) OF
4(c) Break-even 5
budgeted new
Allocated fixed costs $34 500 $40 500 (1) OF both
Contribution per unit ÷ 0 .50 ÷ 0 .54 (1) OF both
Break-even units 69 000 75 000
Selling price per unit × $3 × $3 .15 (1) OF both
Break-even $207 000 $236 250 (1) OF both = increase of $29 250 (1) OF
4(d) Margin of safety 2
New 105 000 – 75 000 = 30 000 units } (1) OF both
budgeted 105 000 – 69 000 = 36 000 units }
decrease of 6000 units (1) OF
4(e) Table to show analysis of results 5
Budgeted After changes
Contribution $52 500 $56 700
Profit $18 000 $14 625
Break-even 69 000 units 75 000 units
Break-even $207 000 $236 250
Margin of safety 36 000 units 30 000 units
4(e) Recommend: The changes are not worthwhile. (1)
Because:
Although budgeted contribution is higher, the profit after the changes is lower (1), due to allocated fixed costs increasing –
advertising and sales bonus. (1)
The margin of safety is lower (1) which means there is less of a buffer / comfort zone before Wye starts to make a loss. (1)
The break-even point is higher (1) which increases the risk (1) of Wye not making enough sales to cover fixed costs. (1)
Accept other valid points.
(1 mark) × any 4 reasons − Max 4
4(f) Possible answers: 4
Identify underperforming products (1)
Ensure sufficiently skilled labour is available to meet production (1)
Ensure sufficient finance is available to continue operations and any planned investments (1)
Ensure the correct quality/cost of material / discounts can be obtained from suppliers (1)
Be able to adapt to changes in the future / provides alternatives if financial targets are not being met (1)
4(f) Price products competitively (1)
Avoid ‘firefighting’ / avoid potential problems in the future (1)
Assess any competition / markets for products (1)
Estimate the likely future position of business − short term and long term (1)
Identify areas of responsibility of managers (1)
(1 mark) × any 4 advantages
Accept other valid points.
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