Accounting 9706/31 May/June 2019: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Structured Questions, May/June 2019. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Trade receivables include $2000 for a customer who has gone bankrupt.
The directors are also of the opinion that a 3% provision for doubtful debts should be created.
Mark scheme
3(a) Cost = $80 therefore selling price = $100 (1) 2
Goods sent on consignment at 100 – (100 × 10%) = $90 (1) OF
3(b)(i) Bank account 3
$00 $00
Balance b/d 55 000 Consignment – transportation 1 000 (1)
Rohan 40 000 (1) OF
Balance c/d 94 000
95 000 95 000
Balance b/d 94 000 (1)
3(b)(ii) Consignment account 7
$00 $00
Goods on consignment 45 000 (1) OF Rohan - sales 72 000 (1) OF
Bank – transportation 1 000 (1)
Rohan – customs duty 2 250 (1) OF
Rohan – commission 3 600 (1) OF
Income statement (1) 20 150 (1) OF
72 000 72 000
3(b)(iii) Rohan account 5
$00 $00
Consignment – sales 72 000 (1) OF Consignment – customs duty 2 250 (1) OF
Consignment- commission 3 600 (1) OF
Bank 40 000 (1) OF
Balance c/d 26 150
72 000 72 000
Balance b/d 26 150 (1) OF
3(c) Profit per screen in the home market is $20 or $10 000 in total. (1) 8
Profit per screen from the consignment is $40.30 or $20 150. (1) OF
Consignment gives an extra profit of $20.30 or $10 150 (1) OF
The transfer price profit increases Ahmed’s profit by $10 or $5 000 (1) OF
A profit has been made on the consignment (1)
Ahmed has built trust with Rohan (1)
Rohan’s knowledge of the overseas market can be used (1)
Ahmed may be able negotiate a lower commission (1) or reallocate transportation costs (1)
Exchange rate / political stability in India (1)
Demand may not continue to increase in the long term
Decision (1)
Accept other valid points.
Award 1 mark for decision, 3 marks for calculation and 4 marks for justification.
Land, with the original cost of $150 000, was revalued to $240 000 on 31 December 2018.
Mark scheme
4(a) Dividend per share 0.08 2
Market price = = (1) = $1.60 (1) OF
Dividend yield 0.05
4(b)(i) 180 000 3
Earnings per share = = $0.18 (1)
1000 000
4(b)(ii) 1.60
Price earnings ratio = = 8.89 times (1) OF
0.18
4(b)(iii) 180
Dividend cover = = 2.25 times (1)
80
4(c) Gross margin of M plc is better (1). Due to higher selling price and / or lower cost of sales. (1) 6
Profit margin of V plc is better. (1) V plc has better control of its expenses. (1)
ROCE of V plc is better (1). Due to generating profits more efficiently from invested capital. (1)
Accept other valid points.
Max. 6
4(d) Both companies have low gearing (1). M has no long term debt (1). Both are low risk (1). 9
The earnings per share of V plc is better (1). The net income from each share is higher (1).
The price earnings ratio of V plc is better (1). Investors are prepared to pay more in relation to earnings / have more
confidence in V plc (1).
The dividend cover of V plc is better (1). Greater share of profits are available to pay dividends (1).
Accept other valid points.
4(e) Advise Pepe to invest in V plc (1). 5
All of the investment ratios except are better (1) OF.
There will be less risk (1) as ROCE is higher so investment should be used more efficiently to generate future profits (1).
Future dividend income is more secure as cover is higher (1).
As only one year’s information is provided there is uncertainty (1).
Accept other valid points.
1 mark for advice and max. 4 for justification.
On 28 December 2018, a new motor vehicle was purchased at a cost of $25 000. An old motor vehicle was part-exchanged for $13 000. This had cost $20 000 and had been depreciated by
$9760. The balance of the purchase price was paid on 31 January 2019.
Mark scheme
5(a) $00 4
Direct materials (7800 × 3 × $5) 117 000 (1)
Direct labour (7800 × 2 × $20) 312 000 (1)
Fixed overhead (7800 × 2 × $8*) 124 800 (1)
Total budgeted production costs 553 800 (1) OF
$128 000
* = $8
(8000 × 2)
5(b)(i) Material price $117 936 − (21 840 × $5) = 8736 (1) (A) (1) 12
5(b)(ii) Material usage (21 840 − 7800 × 3) × $5 = 7800 (1) (F) (1)
5(b)(iii) Labour rate ($33 5790 − 16 380 × $20) = 8190 (1) (A) (1)
5(b)(iv) Labour efficiency (16 380 − 7800 × 2) × $20 = $15 600 (1) (A) (1)
5(b)(v) Fixed overhead expenditure ($131 040 − $128 000) = 3040 (1) (A) (1)
5(b)(vi) Fixed overhead volume ($128 000 − $124 800) = $3200 (1) (A) (1)
5(c) It arises when there is a difference between the actual hours worked (1) (labour hours or machine hours which are the 2
overhead absorption basis) and the hours absorbed. (1)
5(d) Statement reconciling the budgeted production costs with the actual production costs 5
$00 $00 $00
F00 A00
Budgeted production costs 553 800 (1) OF
Material price variance 8 736
Material usage variance 7 800 (1) OF
Labour rate variance 8 190
Labour efficiency variance 15 600 (1) OF
Fixed overhead expenditure variance 3 040
Fixed overhead volume variance 3 200 (1) OF
7 800 38 766 30 966
Actual production costs 584 766 (1)
5(e) The responses may include: 2
Mechanisation (1) which reduces the labour force (1)
Increase selling price (1) which may be difficult (1)
Improve operational efficiency (1) reduce wastage (1)
Accept other valid points.
Max 2
Depreciation for the year ended 31 December 2018 has not been provided. Annual depreciation is to be charged on the following basis:
Land Nil
Building 25 years using the straight-line method
Plant and machinery 10% using the straight-line method
Motor vehicles 20% using the reducing balance method
A full year’s depreciation is charged in the year of purchase, but no depreciation is charged in the year of disposal.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Identify the accounting concept to be applied in respect of:
(i) item 1 [1]
(ii) item 2. [1]
(b) Prepare a statement showing the revised profit for the year ended 31 December 2018. [9]
(c) Calculate the net book value of motor vehicles at 31 December 2018. [4]
(d) Prepare the statement of financial position at 31 December 2018. [10]
[Total: 25]
Question 2
Source A2
Jenny and Thomas are two sole traders. Their statements of financial position at 31 March 2019 were as follows:
Jenny Thomas
$ $
Non-current assets 150 000 90 000
Current assets
Inventory 27 500 11 000
Trade receivables 17 500 6 500
Cash and cash equivalents 9 750 3 750
54 750 21 250
Total assets 204 750 111 250
Capital and liabilities
Capital accounts 170 000 100 000
Current liabilities 34 750 11 250
Total capital and liabilities 204 750 111 250
They agreed to merge their two businesses into a partnership with effect from 1 April 2019.
The terms of the merger were as follows:
1 The value of the non-current assets of both sole traders had increased by 10%.
2 Inventory was valued at $27 000 for Jenny and $10 000 for Thomas.
3 Both sole traders expected 5% of their trade receivables to be written off.
4 All other assets and liabilities, except cash and cash equivalents, were transferred to the partnership at their book value.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Prepare the revised capital accounts of each sole trader at 31 March 2019 to show the transfer to the partnership. [8]
Additional information
The new partnership commenced on 1 April 2019 with total opening capital of $360 000 in the ratio of Jenny 2, Thomas 1. Each partner introduced cash to achieve this.
(b) Calculate the amounts of additional cash that each partner introduced. [2]
(c) Prepare the opening statement of financial position of the new partnership on 1 April 2019. [6]
Additional information
The partners agreed to take equal salaries of $10 000 per annum. The residual profits were to be shared in the ratio of 2:1 respectively.
It is expected that the profit before appropriation for the first year’s trading will give a return of
13.5% on the total opening capital balances.
The average profit of Jenny over the last three years as a sole trader was $35 000 per annum.
(d) (i) Calculate Jenny’s total share of the expected profit for the first year of trading. [3]
(ii) State one advantage and one disadvantage to Jenny of forming the partnership. [2]
Additional information
The partners are considering computerising their accounting system.
(e) State two advantages and two disadvantages to a business of using a computerised accounting system. [4]
[Total: 25]
Question 3
Source A3
Ahmed runs a manufacturing business in Singapore producing computer screens.
For the year ended 31 December 2017 his cost of production per screen was $80 and he operates on a margin of 20%.
For the year ended 31 December 2018 he sent 500 screens to his friend, Rohan, who is a retailer in
India. The transfer value agreed between the friends was 10% less than the standard selling price.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate the unit value at which the screens are transferred from Singapore to India. [2]
Additional information
The following relates to the year ended 31 December 2018.
1 Ahmed’s opening bank balance was $55 000 and the closing balance was $94 000. This bank account was only used for the consignment.
2 Ahmed paid transportation costs of $1000.
3 Rohan sold all of the screens at a mark-up of 60%.
4 Customs duty of 5% was paid by Rohan.
5 Rohan earned a commission of 5% on all sales. Rohan made a remittance to Ahmed.
(b) Prepare in the books of Ahmed:
(i) a summarised bank account showing the entries relating to the consignment [3]
(ii) the consignment account [7]
(iii) the account of Rohan. [5]
Additional information
Demand for Ahmed’s screens is increasing. However, he is unable to increase production. Rohan wishes to continue selling Ahmed’s computer screens in India for the year ending
31 December 2019.
(c) Advise Ahmed whether or not he should continue with the consignment arrangement with
Rohan. Justify your answer using relevant calculations and reference to non-financial factors.
[8]
[Total: 25]
Question 4
Source A4
The directors of M plc have provided the following information from the financial statements for the year ended 30 June 2018.
Ordinary share capital consists of 1 000 000 shares of $1 each.
Profit for the year was $180 000.
Dividends paid during the year totalled $80 000.
Dividend yield was 5%.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate the market price of one ordinary share. [2]
(b) Calculate the following to two decimal places:
(i) earnings per share
(ii) price earnings ratio
(iii) dividend cover.
[3]
Additional information
V plc is a competitor of M plc.
The directors of V plc also prepare accounts to 30 June. The following information for both companies for the year ended 30 June 2018 is available.
M plc V plc
Gross margin 50% 45%
Profit margin 18% 20%
Return on capital employed 15% 18%
Gearing ratio 0% 15%
Market price per share from (a) $2.50
Earnings per share from (b) (i) $0.20
Price earnings ratio from (b) (ii) 12.5 times
Dividend cover from (b) (iii) 4 times
(c) Analyse the performance of both companies by considering only the gross margin, profit margin and return on capital employed. [6]
(d) Analyse the performance of both companies by considering the other ratios. [9]
Additional Information
Pepe, an investor, is considering investing in either M plc or V plc. He is looking for a low risk investment which pays him a regular income with the potential for growth in both annual dividend and share price.
(e) Advise Pepe in which of the two companies he should invest. Justify your answer. [5]
[Total: 25]
Section B: Cost and Management Accounting
Question 5
Source B1
G Limited manufactures a single product. The budgeted information for March 2019 is as follows:
Sales and production 8000 units
Direct materials (per unit) 3 kilos at $5 per kilo
Direct labour (per unit) 2 hours at $20 per hour
The total fixed overheads absorbed on the basis of direct labour hours were $128 000.
The actual sales and production for March 2019 was 7800 units.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Prepare a statement to show the total flexed budgeted production costs for March 2019. [4]
Additional information
The actual production costs for March 2019 were:
$
Direct materials (21 840 kilos) 117 936
Direct labour (16 380 hours) 335 790
Fixed overheads 131 040
Total production costs 584 766
(b) Calculate the following variances.
(i) Material price
(ii) Material usage
(iii) Labour rate
(iv) Labour efficiency
(v) Fixed overhead expenditure
(vi) Fixed overhead volume
[12]
(c) Explain how a fixed overhead capacity variance may arise. [2]
(d) Prepare a statement reconciling the budgeted production costs at 7800 units with the actual production costs. [5]
Additional information
The directors of G Limited expect that labour costs will increase by 10%. The effect of this will be to reduce budgeted profit.
(e) Explain to the directors one way in which they could minimise the effect of the increase in labour costs. [2]
[Total: 25]
Question 6
Source B2
The directors of T Limited are considering investing in Machine A at a cost of $950 000 to manufacture a new product. The estimated cash flows from the new product are as follows:
Cash inflows Cash outflows
$ $
Year 1 640 000 240 000
Year 2 660 000 260 000
Year 3 400 000 200 000
Year 4 300 000 200 000
Machine A has a useful life of 4 years. The residual value is zero.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate the accounting rate of return (ARR) of Machine A. [5]
(b) Calculate the payback period of Machine A. [3]
(c) State two advantages and two disadvantages of using the payback method of investment appraisal. [4]
Additional information
The cost of capital is 8%. The discount factors are:
7% 8%
Year 1 0.935 0.926
Year 2 0.873 0.857
Year 3 0.816 0.794
Year 4 0.763 0.735
(d) Calculate the net present value (NPV) of Machine A. [3]
(e) Calculate the internal rate of return (IRR) of Machine A. [5]
Additional information
Machine B can also be used to manufacture the new product. The following information is available for machine B.
Cost $920 000
Useful life 4 years
Residual value Nil
Accounting rate of return 13.59%
Payback period 3 years 6 months
Net present value at 8% discount rate $20 200
T Limited has limited cash and is likely to borrow money to buy either Machine A or Machine B.
(f) Advise the directors of T Limited which machine they should buy. Justify your answer. [5]
[Total: 25]
Mark scheme
6(a) Cash inflows Cash outflows Net cash flows 5
$00 $00 $00
Year 1 640 000 240 000 400 000
Year 2 660 000 260 000 400 000
Year 3 400 000 200 000 200 000
Year 4 300 000 200 000 100 000
2 000 000 900 000
$2 000 000 – $900 000=$1 100 000 (1)
$1 100 000 – $950 000 = $150 000 (1)
$150 000
= $37 500 (1) OF
4
$37 500
(1) OF = 7.89% (1) OF
$475 000
6(b)
2 years (1) +
( $950 000 − $800 000 ) (1) × 12 = 2 years 9 months (1) 3
$200 000
6(c) Advantages 4
Easy (1)
Uses cash not profit (1)
Accept other valid points.
Disadvantages
No account of time value of money (1)
Does not take account of whole life of project (1)
Accept other valid points.
6(d) Net cash 8% discount Present 3
flows rate value
$00 $00
Year 0 (950 000) 1.000 (950 000) (1)
Year 1 400 000 0.926 370 400
Year 2 400 000 0.857 342 800
Year 3 200 000 0.794 158 800
Year 4 100 000 0.735 73 500 (1) OF
NPV (4 500) (1) OF
6(e) Net cash 7% discount Present 5
flows rate value
$00 $00
Year 0 (950 000) 1.000 (950 000)
Year 1 400 000 0.935 374 000
Year 2 400 000 0.873 349 200
Year 3 200 000 0.816 163 200
Year 4 100 000 0.763 76 300 (1) OF
12 700 (1) OF
12 700
7% (1) + OF X 1 = 7.74% (1) OF
(12700 + 4500 ) (1)
6(f) Should buy Machine B (1) because of positive NPV (1) OF / higher ARR (1) OF 5
However because of limited cash, emphasis should be on early recovery of cash. (1) The earlier the investment is recouped,
the business can use the cash for other purpose, i.e. repayment of loan. (1)
Payback may be better criterion to use for decision (1)
1 mark for decision + Max. 4 for advice.
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