Accounting 9706/22 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.
Lee, a sole trader, provided the following information from his books of account on 30 April 2019.
$
Bank overdraft 11 240
Capital 50 000
Carriage inwards 670
Drawings 24 060
Inventory at 1 May 2018 12 500
3% Loan 20 000
Loan interest 50
Motor vehicles
Cost 32 000
Provision for depreciation 8 000
Office equipment
Cost 4 600
Provision for depreciation 2 400
Other operating costs 61 990
Provision for doubtful debts at 1 May 2018 2 850
Purchases 97 370
Revenue 165 000
Trade receivables 47 890
Trade payables 21 640
The following information is also available.
1 An invoice from a supplier dated 28 April 2019 for goods costing $940 had not been recorded in the books of account. These goods were unsold at the year-end.
2 Inventory was counted at 30 April 2019 and was valued at cost, $21 340.
3 Revenue included goods sold in April 2019 to a credit customer for $3200 on a sale or return basis. These goods were invoiced with a mark-up of 60% and were returned by customer on
5 May 2019.
4 During the year, Lee took goods with a cost of $250 for his own use.
5 The 3% loan was taken out on 1 August 2018 and is repayable in 5 annual instalments starting on 1 August 2019.
6 A debt of $690 was considered to be irrecoverable and was to be written off.
7 The provision for doubtful debts was to be maintained at 5% of the trade receivables.
8 A computer for office use bought on credit on 1 July 2018 costing $1200 had been debited to the purchases account.
9 Depreciation is to be provided as follows:
Motor vehicles 25% per annum using the reducing balance method
Office equipment 10% per annum using the straight-line method
A full year’s depreciation is charged in the year of purchase.
REQUIRED
(a) Prepare Lee’s income statement for the year ended 30 April 2019. Use the space on the next page for your workings.
Workings:
[13]
(b) Prepare the following as they would appear in Lee’s statement of financial position at
30 April 2019.
(i) Current assets
[4]
(ii) Current liabilities
[4]
(c) State two benefits and two drawbacks of operating as a sole trader.
Benefit 1
Benefit 2
Drawback 1
Drawback 2
[4]
Additional information
Lee’s friend Marvin has offered to contribute $50 000 to repay Lee’s business loan and to provide additional working capital.
Marvin has suggested two options.
Option 1: Form a limited company
Lee would issue 125 000 ordinary shares of $1 each. Marvin would subscribe for
50 000 of these shares. Lee and Marvin will become directors of the company and will be paid an annual salary. They plan to declare dividends of 6% per annum.
Option 2: Form a partnership
Marvin would introduce capital of $50 000 on which he would receive annual interest of 6%. He would require a 30% share of the future profits for the year.
REQUIRED
(d) Advise Lee which option he should choose. Justify your answer.
[5]
[Total: 30]
Mark scheme
1(a) Lee 13
Income statement for the year ended 30 April 2019
$ $
Revenue 161 800 (1)
Opening inventory 12 500
Purchases 97 110 (1)
109 610
Less: Goods for own use 250 (1)
109 360
Add: Carriage inwards 670 (1)
110 030
Less Closing inventory 23 340 (1)
Cost of sales 86 690 (1)OF
Gross profit 75 110 (1)OF
Decrease in provision for doubtful debts 650 (1)
75 760
Other operating expenses 61 990
Loan interest 450 (1)
Irrecoverable debts 690 (1)
Depreciation: motor vehicles 6 000 (1)
office equipment 580 (1)
Profit for the year 6050 (1)OF
1(b)(i) Current assets 4
Inventory 23 340 (1) OF
Trade receivables 44 000 (1)
Less: Provision for doubtful debts (2 200) (1) 41 800
6 140 (1) OF
1(b)(ii) 4
Current liabilities
Trade payables (21 640 + 940) 22 580 (1)
3% Loan 4 000 (1)
Bank overdraft 11 240 (1)
Other payables 400 (1)
38 220
1(c) Benefits: (Max 2) 4
Entitled to all profits (1)
Quicker decision making (1)
Full control of business operations (1)
Drawbacks: (Max 2)
Unlimited liability / no separate legal entity (1)
All the risk / responsibilities (1)
Limited opportunities for new ideas (1)
Accept other valid points.
1(d) Decision (1) 5
Limited company (Max 2)
There would be a potential dividend cost of $7500
Payment of dividends is discretionary
Lee retains control of the business as he is the majority shareholder
Partnership (Max 2)
Marvin’s interest on capital will cost a fixed $3000 per annum
Marvin is entitled to 30% of future profits but will also have to bear 30% of future losses
The partnership will have unlimited liability
Sofia has provided the following information relating to her trade receivables at
31 December 2018:
Analysis of trade receivables
0-60 days 61-90 days Over 90 days
Percentage of total trade receivables 68% 20% 12%
1 At 31 December 2018 total trade receivables were $54 500.
2 Dixie, who had been declared bankrupt, owed $1500. This debt was 110 days old at
31 December 2018 and was to be written off.
3 Sofia’s policy is to make a provision for doubtful debts as follows:
5% for debts aged between 61 and 90 days old
7.5% for debts aged over 90 days old.
The balance on the provision for doubtful debts at 1 January 2018 was $1100.
REQUIRED
(a) State the journal entry to write off an irrecoverable debt.
[2]
(b) Calculate the amount of provision for doubtful debts at 31 December 2018.
[4]
(c) Prepare the provision for doubtful debts account for the year ended 31 December 2018. Dates are required.
[2]
(d) Explain one accounting concept which is applied when making a provision for doubtful debts.
[2]
Additional information
Sofia is considering changing the basis of the provision for doubtful debts to a general provision of 2.5% on all trade receivables.
She has calculated her profit for the year ended 31 December 2018 as $4300 after writing off
Dixie’s debt but before making any adjustment for the provision for doubtful debts.
REQUIRED
(e) Describe how this change will affect Sofia’s profit. Support your answer with relevant calculations.
[5]
[Total: 15]
Mark scheme
2(a) Dr Irrecoverable debts (1) 2
Cr Dixie (1)
2(b) $10 900 × 5% = $545 (1) 4
$5 040 × 7.5% = $378 (1)
$923 (2/1)OF
2(c) Provision for doubtful debts account 2
2018 $ 2018 $
Dec 31 Income statement 177 (1) OF Jan 1 Balance b/d 1100
Balance c/d 923
1100 1100
2019
Jan 1 Balance b/d 923 (1) OF
2(d) Prudence (1) 2
Profit/current assets/trade receivables should not be overstated (1)
OR
Matching / accruals (1)
Revenue of an accounting period is matched against the costs of the same period (1)
2(e) Sofia’s profit would now be $4075 (4) a decrease of $402. (1) 5
Workings
Using the existing policy the profit would be $4477 (1) due to a decrease in the provision for doubtful debts (1) OF
Under proposed change, the closing balance on the provision for doubtful debts account would be $1325 (1).
Financial statements provide information to enable users to evaluate the financial performance of a business.
(a) State three reasons why it might be difficult to compare financial ratios between businesses in the same industry.
1
2
3
[3]
X Limited is a wholesaler of sports goods. The directors of the company have provided the following information for the year ended 30 April 2019.
$
Revenue 742 630
Cost of sales (459 991)
1 For the year ended 30 April 2019 the rate of inventory turnover was 7.5 times. The value of inventory at 1 May 2018 was $57 682.
2 At 30 April 2019 the trade receivables turnover was 35 days and the trade payables turnover was 32 days.
3 All sales are made on credit. Credit purchases amounted to 80% of the value of cost of sales.
REQUIRED
(b) Calculate at 30 April 2019:
(i) closing inventory
[3]
(ii) trade receivables
[1]
(iii) trade payables.
[2]
Additional information
X Limited has an operating expenses to revenue ratio of 30%. Distribution costs are twice as much as administrative expenses. Finance costs are 5% of the profit for the year.
REQUIRED
(c) Prepare the income statement for X Limited for the year ended 30 April 2019.
[3]
Additional information
On 1 October 2018 X Limited paid a dividend of $25 000 on the basis of $0.08 per ordinary share of $1 each.
On 1 February 2019 X Limited made a rights issue of 1 ordinary share for every 5 held at a premium of $0.50. This was the first time that X Limited had issued new shares. The rights issue was fully subscribed.
REQUIRED
(d) Calculate the proceeds received by X Limited from the rights issue.
[3]
[Total: 15]
Mark scheme
3(a) Companies may use different accounting policies (1) 3
Historical cost is used to prepare accounts therefore may be misleading (1)
There may be different year-ends/seasonal factors (1)
There may be non-monetary factors to consider (1)
Relative size of each business (1)
The effect of window dressing (1)
Accept any other valid responses
Max 3 marks
3(b)(i) $459 991 3
Average inventory = = $61 332 (1)
7.5
Average inventory × 2 = $122 664 (1)OF
Closing inventory = $122 664 – $57 682
= $64 982 (1)OF
3(b)(ii) ( 35 × $742 630 ) = $71 211 (1) 1
365
3(b)(iii) ( 32 × $367 993 * ) = $32 262 (1) OF 2
365
* Credit purchases = $459 991 × 80% = $367 993 (1)
3(c) X Limited 3
Income Statement for the year ended 30 April 2019
$
Revenue 742 630
Cost of sales (459 991)
Gross profit 282 639
Distribution costs (148 526) (1)
Administrative expenses (74 263) (1)
Profit from operations 59 850
Finance costs (2 850) (1)
Profit for the year 57 000
3(d) $312 500 (1) / 5 = 62 500 shares (1) × $1.50 = $93 750 (1)OF 3
Jessie is a manufacturer and uses a single raw material to make her product. The following table shows inventory transactions for the month of March 2019.
Per kilo
Date Kilos
$
March 1 Opening balance 1500 1.90
3 Receipts 3500 1.92
10 Receipts 2000 1.95
17 Receipts 1500 2.00
Jessie uses the First In First Out (FIFO) method to value her inventory. The following issues to production took place.
Date Kilos
March 5 3000
23 4500
REQUIRED
(a) Calculate the following in dollars:
(i) the value of issues to production on 5 March
[2]
(ii) the value of issues to production on 23 March
[3]
(iii) the value of closing inventory at 31 March.
[1]
(b) State two advantages to a business of using the FIFO method of inventory valuation.
1
2
[2]
Additional information
The business has two production cost centres: machining and assembly, and one service cost centre: stores.
The following budgeted information is available for the year ending 31 December 2019.
Budgeted overheads $ Basis of apportionment
Depreciation 9 760 Non-current asset at cost
Heat and light 13 850 Kilowatt hours
Machinery maintenance 6 500 Machine hours
The following budgeted information is also available.
Service
Production cost centres cost centre
Machining Assembly Stores
Kilowatt hours 4 200 2 100 700
Non-current assets at cost ($) 91 000 28 000 21 000
Stores requisitions 375 125
Direct labour hours 2 700 6 300
Machine hours 13 400 3 350
REQUIRED
(c) Complete the following table to show the apportionment of budgeted overhead costs for the year ending 31 December 2019.
Service cost
Production cost centres
Total centre
$ Machining Assembly Stores
$ $ $
Depreciation
Heat and light
Machinery maintenance
Total overheads apportioned
Re-apportionment of stores
Total overheads cost
[6]
(d) Calculate, to two decimal places, an overhead absorption rate for each production cost centre, using a suitable basis.
[4]
Question 4 (e) is on the next page.
Additional information
On 1 April 2019 a customer asked Jessie to quote for an order of 200 units of her product. Each unit requires the following:
Direct labour 2.5 hours at $4 per hour
Direct material 3 kilos
Overheads Machining department
1.5 machine hours
0.8 direct labour hours
Assembly department
1.0 machine hour
2.0 direct labour hours
Jessie marks up all orders by 25%.
REQUIRED
(e) Prepare a statement to show the total selling price that Jessie will quote to the customer.
[7]
Additional information
The same customer offers to pay Jessie the quoted price less a 10% discount. Jessie’s factory has spare capacity.
REQUIRED
(f) Advise Jessie whether or not she should accept the offer. Justify your answer.
[5]
[Total: 30]
Mark scheme
4(a) Workings:
Per kilo Issues Total
Date Kilos
$ $ $
March 1 Opening balance 1500 1.90
3 Receipts 3500 1.92
5 Issues 3000 1500 × 1.90 2850
1500 × 1.92 2880
5730
10 Receipts 2000 1.95
17 Receipts 1500 2.00
23 Issues 4500 2000 × 1.92 3840
2000 × 1.95 3900
500 × 2.00 1000
8740
31 Closing balance 1000 × 2.00 2000
4(a)(i) 2850 (1) + 2880 (1) = 5730 2
4(a)(ii) 3840 (1) + 3900 (1) + 1000 (1) = 8740 3
4(a)(iii) 2000 (1) 1
4(b) Easy to calculate (1) 2
Inventory value is closer to current market value (1)
An accepted method of valuing inventory for the financial statements (1)
Max 2 marks
Accept other valid points.
4(c) 6
Service cost
Production cost centres
centre
Total
$ Stores
Machining Assembly
$ $
$
Depreciation 9 760 6 344 1 952 1 464 (1) row
Heat and Light 13 850 8 310 4 155 1 385 (1) row
Machinery maintenance 6 500 5 200 1 300 - (1) row
Total overheads 19 854 7 407 2 849
apportioned
Re-apportionment of stores 2 137 712 (2 849) (1) row
Total overhead cost 21 991 (1) OF 8 119 (1) OF
4(d) Machining 4
Overhead cost $21 991
Machine hours 13 400 = $1.64 (1) OF per machine hour (1)
Assembly
Overhead cost $8 119
Labour hours 6 300 = $1.29 (1) OF per direct labour hour (1)
4(e) $ 7
Direct materials (3 kilos × $2.00 ) 6.00 (1)
Direct labour (2.5 hours × $4) 10.00 (1)
Overheads (machining 1.5 hours × $ 1.64) 2.46 (1) OF
Overheads (assembly 2 hours × $1.29 ) 2.58 (1) OF
Cost per unit 21.04
× 200 units
Total cost 4 208 (1) OF
Mark-up/profit (25%) 1 052 (1) OF
Total selling price 5 260 (1) OF
OR $
Direct materials 1 200 (1)
Direct labour 2 000 (1)
Overheads 492 (1) OF
Overheads 516 (1) OF
Total cost 4 208 (1) OF
Mark-up/profit (25%) 1 052 (1) OF
Total selling price 5 260 (1) OF
4(f) The offer still provides a positive contribution/generates profit (1) 5
This will result in increased overall profits for the business (1) albeit the offer price will not achieve the usual mark up of 25%
(1)
The order will make use of existing spare capacity (1) which could be used to manufacture goods with a better mark-up (1)
Is this a one-off order or will the customer expect future orders at the same price (1). Other customers could also want to buy
at a reduced price (1) , and it could cause ill feeling with other customers (1)
Decision (1)
(1 mark) × any 4 points – Max 4 for comments
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Accounting 9706/22 for May/June 2019 is out of 90 marks, with 1 hour 30 minutes to answer it, across 4 questions.
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