Accounting 9706/23 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.
D Limited is a retailer of sports equipment. The following balances have been extracted from the books of account at 31 December 2018.
Debit Credit
$000 $000
8% Debentures (2021–23) 250
10% Bank loan 60
Administrative expenses 608
Bank overdraft 11
Carriage inwards 8
Carriage outwards 22
Distribution costs 937
Dividends paid 35
Land and buildings at 1 January 2018
Cost 2 100
Provision for depreciation 360
Fixtures and fittings at 1 January 2018
Cost 840
Provision for depreciation 320
Motor vehicles at 1 January 2018
Cost 202
Provision for depreciation 106
Interest paid 29
Inventory at 1 January 2018 620
Property costs 239
Purchases 2 502
Retained earnings 898
Returns outwards 12
Revenue 5 120
Share capital – ordinary shares of $0.50 each 1 200
Share premium 60
Trade payables 385
Trade receivables 640
The following information is also available.
1 Revenue included goods that had been sold to a customer on a sale or return basis on
28 December 2018. The selling price of the goods was $40 000 and they were sold at a mark-up of 25%. The directors were unsure whether or not the goods would be returned.
2 Inventory on D Limited’s premises at 31 December 2018 had been counted and valued at a cost of $585 000.
3 Included in distribution costs is $24 000 in respect of delivery van licenses for the year ended
31 March 2019.
4 The breakdown of land and buildings cost at 1 January 2018 was:
$
Land 1 200 000
Buildings 900 000
2 100 000
The buildings were revalued on 2 January 2018 at $1 050 000. This has not yet been recorded in the books of account.
5 At 31 December 2018, administration wages and salaries accrued totalled $15 000.
6 The directors wish to create a provision for doubtful debts of 3%. This is to be included in administrative expenses.
7 Depreciation is to be charged as follows:
Asset Annual rate Method Charge to
Fixtures and fittings 15% Reducing balance Administrative expenses
Buildings 2% Straight-line Property costs
Motor vehicles 25% Reducing balance 75% Distribution costs
25% Administrative expenses
8 A full year’s interest has been paid on debentures and bank loan.
REQUIRED
(a) Prepare the income statement for the year ended 31 December 2018. Use the space on the next page for your workings.
D Limited
Income statement for the year ended 31 December 2018
$000
Revenue
Cost of sales
Gross profit
Administrative expenses
Distribution costs
Property costs
Profit from operations
Finance costs
Profit for the year
Workings
Revenue
Cost of sales
Administrative expenses
Distribution costs
Property costs
Depreciation
[13]
(b) Prepare an extract showing the current assets section only of the statement of financial position at 31 December 2018.
D Limited
Extract from the statement of financial position at 31 December 2018
Current assets
[3]
(c) Prepare a statement for the directors to show the total value of equity at 31 December 2018.
[5]
Additional information
The directors wish to raise additional finance for expansion. They are considering two options.
1 Issue 5% preference shares of $1 each to raise $300 000.
2 Obtain an 8% bank loan to raise $300 000.
REQUIRED
(d) Advise the directors which option they should choose. Justify your answer.
[5]
(e) Explain two differences between a bonus issue of shares and a rights issue of shares.
1
2
[4]
[Total: 30]
Mark scheme
1(a) D Limited 13
Income statement for the year ended 31 December 2018
$000
Revenue 5080 (1)
Cost of sales (2501) (3)
Gross profit 2579
Administrative expenses (725) (4)
Distribution costs (971) (3)
Property costs (260) (1)
Profit from operations 623
Finance costs (29)
Profit for the year 594 (1)
Workings
Revenue 5120 – 40 = 5080 (1)
Cost of sales 620 + 8 (1) + 2502 – 12 (1) – 617 (1) = $2501
Administrative expenses 608 + 78 (1) + 6 (1) + 18 (1) + 15 (1) = 725
Distribution costs 937 + 22 (1) – 6 (1) + 18 (1) = 971
Property costs 239 + 21 = 260 (1)
Depreciation
Buildings: 1050 × 2% = 21 (Property costs)
Fixtures and fittings: 520 × 15% = 78 (Administration expenses)
Motor vehicles: 96 × 25% = 24 (Distribution costs $18, Administrative expenses $6)
1(b) D Limited 3
Extract from the statement of financial position at 31 December 2018
Current assets
$000
Inventory 617 (1) OF
Trade receivables (600 – 18) 582 (1)
Other receivables 6 (1)
1205
1(c) 5
$000
Share capital – ordinary shares of $0.50 each 1200
(1) for both
Share premium 60
Revaluation reserve (1050 – 540) 510 (1)
Retained earnings ((898 + 594) (1) OF – 35 (1) 1457
3227 (1) OF
1(d) Preference shares (Max 2 marks) 5
Permanent capital (1)
Incurs annual finance costs of $15 000 (1)
Issuing will cost will be more time consuming/costly (1)
Bank loan (Max 2 marks)
Has to be repaid (1)
Incurs annual finance costs of $24 000 (1)
Bank may/may not be willing to advance the loan at lower interest rate than the current loan (1)
May require security (1)
Advice (1)
Accept other valid points.
1(e) Bonus shares are not paid for, (1) Rights issue are paid for (1) 4
Bonus shares do not change the net assets, (1) Rights issue increases net assets (1)
Bonus shares are issued to all shareholders, (1) Shareholders have a choice whether to take up rights issue. (1)
Bonus shares are issued at par value, (1) Rights issue may be made at a discount to market value/at a premium (1)
Bonus shares do not give additional capital/equity, (1) Rights issue gives additional capital/equity (1)
2 marks × max 2 points of difference
John, Kathy and Liz have been in partnership sharing profits and losses in the ratio 4 : 3 : 3. They have agreed to dissolve the partnership.
REQUIRED
(a) State three reasons why a partnership may be dissolved.
1
2
3
[3]
Additional information
At the time of the dissolution the partnership’s statement of financial position was as follows:
Statement of financial position at 31 March 2018
$ $
Assets
Non-current assets at net book value
Motor vehicles 29 400
Furniture and equipment 15 600
45 000
Current assets
Inventory 14 920
Trade receivables 11 540
26 460
Total assets 71 460
Capital and liabilities
Capital accounts
John 28 000
Kathy 21 000
Liz 19 000
68 000
Current accounts
John (2 200)
Kathy 1 400
Liz (1 800)
(2 600)
Current liabilities
Bank overdraft 6 060
Total capital and liabilities 71 460
The following information is also available.
1 At dissolution John took over the furniture and equipment at an agreed valuation of $9500 and the inventory at a valuation of $11 000.
2 Liz took over a motor vehicle at an agreed valuation of $16 600; the other motor vehicle was sold for $8450.
3 The balance of one credit customer who owed $740 was written off as irrecoverable. The remaining trade receivables settled their accounts in full less a cash discount of 5%.
4 Cost of dissolution, $2350, was paid from the bank account.
REQUIRED
(b) Prepare the partnership realisation account.
[7]
(c) Calculate the amount to be paid to, or to be received from, John on dissolution.
[5]
[Total: 15]
PLEASE TURN OVER
Mark scheme
2(a) Death / ill health / retirement of a partner (1) 3
A partner has been declared bankrupt (1)
Disagreement between partners (1)
Insufficient level of profits (1)
Insufficient levels of cash reserves (1)
Partnership has achieved its purpose (1)
Accept other valid points.
Max 3 marks
2(b) Realisation account 7
$ $
Motor vehicles 29 400 Capital: John
Furniture and equipment 15 600 Furniture and equipment 9 500
(1) (1)
Inventory 14 920 Inventory 11 000
Trade receivables 11 540 Capital: Liz
Bank: dissolution costs 2 350 (1) Motor vehicle 16 600 (1)
Bank:
Motor vehicle 8 450 (1)
Trade receivables (W1) 10 260 (1)
Realisation loss:
John 7 200
Kathy 5 400 (1) OF
Liz 5 400
73 810 73 810
2(b) Alternative presentation:
Realisation account
$ $
Assets to be realised 71 460 (1) Capital: John – assets 20 500 (1)
Bank: dissolution costs 2 350 (1) Capital: Liz – motor vehicle 16 600 (1)
Bank – motor vehicle 8 450 (1)
Bank – trade receivables (W1) 10 260 (1)
Realisation loss
John 7 200
Kathy 5 400 (1) OF
Liz 5 400
73 810 73 810
W1 Receipts from trade receivables: 95% × ($11 540 − $740) = $10 260
2(c) Amounts due to/from John 5
John
$
Capital balance 28 000 (1)
Current account balance (2 200) (1)
Assets taken over (20 500) (1)
Realisation loss (7 200) (1) OF
Amounts due from John (1 900) (1) OF
Cheng, a sole trader, maintains control accounts.
REQUIRED
(a) Explain two benefits to a business of maintaining control accounts.
1
2
[4]
Additional information
At 31 December 2018, Cheng’s bookkeeper prepared a purchases ledger control account and a sales ledger control account. However, the balances of the control accounts did not agree with the total of the individual balances recorded in the relevant ledgers. The details were as follows:
$
Purchases ledger
Total of ledger accounts 18 496
Control account balance 18 981
Sales ledger
Total of ledger accounts 11 117
Control account balance 12 385
Cheng’s bookkeeper has discovered the following:
1 Cash sales of $480 had been recorded in the sales ledger control account.
2 A credit note for $228 had been recorded as $282 in both the purchases returns journal and the supplier’s account.
3 The account of a customer with a balance of $485 had been set off against his account in the purchases ledger. No record of this transaction had been made in the purchases ledger control account.
4 Interest of $67 charged by a trade supplier on an overdue account had not been recorded in the books of account.
5 A dishonoured cheque of $394 had been correctly recorded in the cash book but had been posted to the credit side of the customer’s account.
REQUIRED
(b) Prepare a corrected:
(i) Purchases ledger control account
$ $
Balance b/d 18 981
[4]
(ii) Sales ledger control account
$ $
Balance b/d 12 385
[2]
(c) Calculate amended totals for the:
(i) purchases ledger accounts
[3]
(ii) sales ledger accounts.
[2]
[Total: 15]
Mark scheme
3(a) Provides an arithmetical check on the accuracy of the ledgers (1), as the balances on each control account should agree with 4
the total of balances in each ledger. (1)
Helps prevent fraud (1) as the work of those employees working on each ledger is independently checked by another
employee. (1)
Provides a figure for total trade receivables and total trade payables (1) aiding preparation of financial statements. (1)
Any two benefits, 2 marks each
3(b)(i) Purchases ledger control account 4
$ $
Contra error 485 (1) Balance b/d 18 981
Balance c/d 18 617 Purchase returns error 54 (1)
Interest error 67 (1)
19 102 19 102
Balance b/d 18 617 (1) OF
3(b)(ii) Sales ledger control account 2
$ $
Balance b/d 12 385 Cash sales error 480 (1)
Balance c/d 11 905
12 385 12 385
Balance b/d 11 905 (1) OF
3(c)(i) Purchases ledger accounts 3
$
Original total 18 496
Purchases returns error 54 (1)
Interest charged on overdue account 67 (1)
18 617 (1) OF
Final balances c/d must be the same amount in the purchases ledger control account and the purchases ledger balances.
3(c)(ii) Sales ledger accounts 2
$
Original total 11 117
Dishonoured cheque 788 (1)
11 905 (1) OF
Final balances c/d must be the same amount in the sales ledger control account and the sales ledger balances.
Ethan owns a factory which produces hand-painted pots. The factory employees receive piecework payments.
REQUIRED
(a) State what is meant by ‘piecework payments’.
[1]
(b) Explain what is meant by ‘production overheads’.
[2]
Additional information
The following budgeted information is available for the year ending 30 June 2020.
1 Sales ($12 per unit)
$
1 July – 30 Sept 2019 171 000
1 Oct – 31 Dec 2019 171 000
1 Jan – 31 Mar 2020 186 000
1 Apr – 30 June 2020 192 000
2 Costs for the year
$
Advertising 24 000
Direct labour 270 000
Direct material C 48 000
Direct material D 90 000
Fixed production overheads 30 000
3 The salesperson receives a basic salary plus commission payment.
Basic salary $51 000 per annum
Commission 3.5% of sales revenue
REQUIRED
(c) Calculate for the year ending 30 June 2020:
(i) the total budgeted fixed selling expenses
[1]
(ii) the total budgeted variable selling expenses
[1]
(iii) the total budgeted contribution
[1]
(iv) the total budgeted profit.
[1]
Additional information
Ethan has received an order, directly from a customer, for an additional 15 000 pots at a selling price of $8 per pot. The order is to be delivered in November 2019.
The following information is relevant to this order.
1 The existing labour force can produce a maximum of 70 000 pots each year.
2 Additional temporary labour can be hired at $5.25 per unit.
3 The current supplier can only guarantee the material prices for a maximum of 70 000 pots. To purchase extra material C to produce any units in excess of 70 000 the cost will increase by
5% and the cost of material D will increase by 2%.
4 There is sufficient space in the factory to produce the order.
REQUIRED
(d) Calculate the additional profit or loss made on this order.
[13]
(e) Advise Ethan whether or not he should accept the order. Justify your answer taking into account both financial and non-financial factors.
[5]
(f) State two benefits and three limitations to a business of using cost–volume–profit analysis.
Benefit 1
Benefit 2
Limitation 1
Limitation 2
Limitation 3
[5]
[Total: 30]
Mark scheme
4(a) Payment to employee is based on the number of completed units they produce (1) 1
4(b) Production overheads include all factory indirect costs (1) that cannot be traced directly to a unit of production (1) 2
4(c)(i) 1
$
Advertising 24 000
Sales team salaries 51 000
Fixed selling expenses 75 000 (1)
4(c)(ii) Variable selling expenses $720 000 × 3.5% $25 200 (1) 1
4(c)(iii) $ 1
Sales 720 000
Less:
Direct labour 270 000
Material C 48 000
Material D 90 000
Variable selling expenses 25 200
Contribution 286 800 (1) OF
4(c)(iv) $ 1
Sales 720 000
Less:
Direct labour 270 000
Material C 48 000
Material D 90 000
Fixed production overheads 30 000
Fixed selling expenses 75 000
Variable selling expenses 25 200
Profit 181 800 (1)
Alternative $
Contribution 286 800
Fixed selling expenses 75 000
Fixed production overheads 30 000
181 800
4(d) Additional order for 15 000 pots: 13
Budgeted capacity – current capacity = 70 000 – 60 000 = 10 000 spare capacity. (1)
Order – spare capacity = 15 000 – 10 000 = 5000 additional capacity (1) required
to meet the order. These will incur extra costs.
Forecast incremental profit statement
Exclude variable selling expenses and fixed costs as they are not relevant to the order.
$ $
Sales 120 000 (1)
Less variable costs
Direct labour 10 000 × $4.50 (1) 45 000
5 000 × $5.25 (1) 26 250 71 250 (1)
Material C 10 000 × $0.80 (1) 8 000
5 000 × $0.84 (1) 4 200 12 200 (1)
Material D 10 000 × $1.50 (1) 15 000
5 000 × $1.53 (1) 7 650 22 650 (1) 106 100
Profit 13 900 (1) OF
4(e) Accept / Reject (1) 5
Financial (Max 2)
Will provide increase in sales revenue.
The order provides positive contribution/profit OF so is worthwhile.
Will there be an increase in the fixed cost?
Would it be less expensive to pay the existing workforce a premium for the additional units?
Non-financial (Max 2)
What effect will the lower price have on other customers who are paying $12?
Will the temporary labour be available immediately/ existing workforce be willing to work overtime?
Will the product quality remain the same if temporary labour is used / do they have the necessary skills for hand painted pots?
Will the morale of the existing workforce go down if temporary labour is employed?
1 mark for decision
Accept other valid points.
4(f) Benefits (Max 2) 5
Aids short-term decision making.
Identifies break-even point/margin of safety/project profit.
Accept other valid points.
Limitations (Max 3)
It assumes that total fixed costs are constant.
It assumes variable costs per unit are the same.
It assumes the selling price per unit remains the same.
It assumes sales and production levels are the same.
It assumes product mix remains constant.
It ignores uncertainty in estimates of fixed costs and variable costs.
Some costs are difficult to classify as fixed or variable.
Accept other valid points.
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Accounting 9706/23 for May/June 2019 is out of 90 marks, with 1 hour 30 minutes to answer it, across 4 questions.
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