Accounting 9706/32 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.
The prime cost for the year was 10% greater than the previous year.
Mark scheme
1(a)(i) Prime cost is the direct (1) cost of a manufactured product. It is the total of direct materials, direct labour and direct 2
overheads/expenses. (1)
1(a)(ii) Units of production which are only part completed (1) with regard to materials and / or labour. (1) 2
1(b) Manufacturing Account 13
For the year ended 31 December 2018
$000
Prime cost 385 (1)
Add:
Indirect wages 40 (1)
General expenses 29 (2) W1
Power 24 (2) W2
Depreciation 120 (2) W3 213
598
Add: opening work-in-progress 23 (1)
621
Less: closing work-in-progress (31) (1)
Cost of production 590 (1) OF
Factory profit/mark-up 118 (1) OF
Transferred to income statement 708 (1) OF
W1 General expenses 64 – 6 = 58 (1) × 50% = 29 (1) OF
W2 Power 36 + 4 = 40 (1) × 60% = 24 (1) OF
W3 Depreciation 450 × 25% = 112.5 (1)
30 × 25% = 7.5 (1)
120.0
1(c) The inventory should not have been included at that figure (1) because the figure contains unrealised / factory profit. (1) 8
Realisation concept (1) – transaction is accounted for when converted into money. (1)
Prudence concept (1) – inventory and profit should not be overstated/inventory valued at lower of cost and NRV per IAS 2. (1)
100
Correct value should be $33 000 × (1) = $27 500 (1) or $33 000 – $5500 (1) = $27 500 (1)
120
The value after reduction of the unrealised profit is the value to be shown in the statement of financial position. (1)
A provision for unrealised profit is created (1)
Max 2 for concept identification; Max 2 for calculation; Max 3 for explanation and 1 mark for correct decision.
Indirect wages are to be apportioned between the factory and office in the ratio 2 : 3 respectively.
Mark scheme
2(a) Profit for the year ended 31 December 2018 3
Dividend yield = 5%
Dividend per share = $2.4 × 5% = $0.12 (1)
Total dividend paid = $0.12 × 450 000 = $54 000 (1) OF
Dividend cover = 2.5 times
Profit = $54 000 × 2.5 = $135 000 (1) OF
Alternative approach (market value)
450 000 shares × $2.40 = $1 080 000 (1)
Dividend = $1 080 000 × 5% = $54 000 (1) OF
Dividend cover = 2.5 times
Profit = $54 000 × 2.5 = $135 000 (1) OF
2(b) V plc
Statement of financial position at 31 December 2018
$
Non-current assets 505 272
Current assets
Inventory W1 80 295 (4)
Trade and other receivables W2 120 000 (2)
Cash at bank (balancing) 54 297 (1) OF
254 592
Total assets 759 864
Equity and liabilities
Equity
Ordinary shares of $1 each 450 000 } (1) both
Share premium 70 000 }
Retained earnings W3 155 000 (3) OF
Total equity 675 000
Liabilities
Trade and other payables W4 84 864 (3)
Total equity and liabilities 759 864 (1) OF
2(b) Workings: 15
W1 Cost of sales = $876 000 × 55% = $481 800 (1)
Opening inventory = $78 105
Inventory turnover = 60 days
Closing inventory = 2 × [($481 800 × 60) / 365] (1) OF – $78 105 (1) = $80 295 (1)OF
W2 Credit sales $876 000
Trade receivables turnover 50 days
Trade receivables =
($876 000 × 50) (1)
= $120 000 (1) OF
365
W3 $
Retained earnings 1 January 2018 74 000
Profit for the year (from 2(a)) 135 000 (1) OF
Dividend paid (from 2(a)) (54 000) (1) OF
155 000 (1) OF
W4 Cost of sales = $876 000 × 55% = $481 800
Purchases = $481 800 + $80 295 − $78 105 = $483 990 (1) OF
Trade payables turnover = 64 days
Trade payables = ($483 990 × 64) / 365 (1) OF = $84 864 (1) OF
2(c) Earnings per share = $135 000 / 450 000 = $0.30 (1) OF 2
$2.40
Price earnings ratio = = 8 (1) OF
$0.30
Alternative approach (market value)
$1 080 000 / $135 000 (1) OF = 8 (1) OF
2(d) The gross margin / profitability of V plc is better than that of T plc. (1) This suggests that the selling price of V plc is higher / 5
the cost of sales is lower (1) than T plc.
V plc is more efficient / has a better inventory turnover period than T plc. (1) This suggests that V plc can sell goods at a faster
rate (1) or its inventory level is kept at a lower level / has lower storage costs. (1)
Accept other valid points.
Max 5
General expenses of $6000 were prepaid. General expenses are to be apportioned equally between the factory and the office.
Mark scheme
3(a) The answers may include: 2
Increases the credibility of the financial statements which ensures they are fair and true
Helps detect errors and frauds which increases the confidence of shareholders
Represents an independent review of the financial statements which increases their reliability
1 mark for identifying one benefit and 1 further mark for development, up to a maximum of 2 marks.
Accept other valid points.
3(b) Item 1 – IAS 36 (1) Impairment of assets suggests that an impairment loss should be made if the carrying amount of an asset 7
is more than its recoverable amount. (1) The carrying amount of the equipment is $140 000 which is more than the
recoverable amount $136 000, (1) (the higher of $132 000 fair value and $136 000 value in use), impairment of $4000 should
be made. (1)
Item 2 – IAS 10 (1) Events after the reporting period is relevant as a proposed dividend is a non-adjusting event (1). In this
case, the proposed dividend is not a liability at the year-end and will be disclosed as a note to the accounts. (1)
Item 3 – IAS 37 (1) Provision, contingent liabilities and contingent assets suggests that a provision is made only when there is
a present obligation arising from a past event. (1) Therefore no provision is recognised for costs that will be incurred in the
future. (1)
Item 1: Max 3 marks
Item 2: Max 2 marks
Item 3: Max 2 marks
3(c) Revised retained profits at 31 December 2018 6
$
Retained earnings 184 000
Impairment loss (4000) (1)
Proposed dividend 12 000 (1)
Provision for advertising expenses 25 000 (1)
Deposit 3000 (1)
Sales − sale or return basis (7000) )
Inventory − sale or return basis 5400 ) (1)
Revised retained earnings 218 400 (1) OF
3(d) $ 5
(i) Property, plant and equipment ($682 000 – $4000) = 678 000 (1)
(ii) Inventory ($94 200 + $5400) = 99 600 (1)
(iii) Trade receivables ($87 400 – $7000) = 80 400 (1)
(iv) Other receivables ($9430 + $3000) = 12 430 (1)
(v) Total assets:
= $678 000 + $99 600 + $80 400 + $12 430 + $21 170 = $891 600 (1) OF
3(e) Arguments for increasing the dividend 5
Existing shareholders will be satisfied resulting in them retaining their shares (1)
Higher dividend policy may convey a strong message to shareholders leading to a possible increase in share value (1)
Increased dividends may be attractive to potential new investors providing investment for growth (1)
Arguments for not increasing the dividend
Company may be short of cash (1)
Directors are retaining earnings for future development (1)
Higher retained earnings may lead to a higher share value in the long run (1)
Max 4 for comments plus 1 mark for recommendation
Accept other valid points.
A power bill of $4000 remained unpaid. 60% of the total power expense is charged to the factory.
Mark scheme
4(a) Roberto and Sasha each contributed $1000 to start the joint venture. (1) This represented the capital of the joint venture. (1) 2
4(b) Because they are capital transfers (1) and do not affect the profit of the joint venture. (1) 2
4(c) (2500 + 50) (1) – 2020 (1) = $530 3
Roberto $265, Sasha $265 (1) OF (correct split)
4(d)(i) Roberto account 5
$ $
JV account (sales) 700 (1) JV bank 1000 (1)
JV bank (balancing) 685 (1) OF JV account (costs) 120 (1)
JV account (profit) 265 (1) OF
1385 1385
4(d)(ii) Sasha account 4
$ $
JV bank (balancing) 1465 (1) OF JV bank 1000 (1)
JV account (costs) 200 (1)
JV account (profit) 265 (1) OF
1465 1465
4(e) The increase in mark-up could increase Sasha’s share of profit (1) by $237.50 (1) 5
Increasing the prices may not result in all inventory being sold (1)
Unsold goods may have to be sold off at discounted prices (1)
The experience of previously working together may be beneficial (1)
Annual event might encourage competition from other stalls selling sports equipment (1)
Competitors may be charging lower prices that would reduce sales (1)
It would be better if Roberto had done market research to justify his increase in mark-up (1)
This joint venture may lead to future business opportunities between the two (1)
(1) for decision, max (4) for comments
Accept other valid points.
4(f) Business – seeks to make a profit (1) and operates for the benefit of owners (1) 4
Club – not for profit (1), primarily seeks to provide a service to its members (1), may sell at subsidised prices (1)
Max (2) for each organisation
The value of work in progress was $31 000.
The following information is also available for the year ended 31 December 2018.
1 A new item of factory plant was acquired on 31 October 2018 at a cost of $30 000. This transaction has not been recorded in the books of account.
Factory plant is depreciated at 25% per annum using the reducing balance method. A full year’s depreciation is charged on assets acquired during the year.
2 Goods are transferred to the sales department at a mark-up of 20%.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Explain what is meant by:
(i) prime cost [2]
(ii) work in progress. [2]
(b) Prepare the manufacturing account for the year ended 31 December 2018. [13]
Additional information
After the draft statement of financial position had been prepared it was noted that the inventory value of finished goods was $33 000. This was the value at which these goods had been transferred from the manufacturing account.
(c) Discuss whether the inventory should have been included at this value. Justify your answer by referring to relevant accounting concepts and appropriate calculations. [8]
[Total: 25]
Question 2
Source A2
V plc had capital of 450 000 ordinary shares of $1 each. The following information was available at
31 December 2018.
1 The market price of one ordinary share was $2.40.
2 Dividend yield was 5%.
3 Dividend cover was 2.5 times.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate the profit for the year ended 31 December 2018. [3]
Additional information
The following information was also available for the year ended 31 December 2018.
1 Sales revenue for the year was $876 000. All the sales were on credit and had earned a gross margin of 45%.
2 All purchases of goods were on credit.
3 Current assets at 31 December comprised inventory, trade receivables and cash at bank.
4 Current liabilities at 31 December comprised trade payables only. The current ratio was 3 : 1.
5 Other accounting ratios were:
Inventory turnover 60 days
Trade receivables turnover 50 days
Trade payables turnover 64 days
Mark scheme
5(a)(i) 2020 2021 2022 5
$ $ $
Cash inflows from sales 840 000 882 000 926 100 (1) for all
Cash outflows for cost of sales 420 000 441 000 463 050 (1) for all
Machine maintenance cost 10 000 20 000 30 000 (1) for all
Other operating costs 120 000 120 000 120 000 (1) for all
Net cash flow 290 000 301 000 313 050 (1) OF for all
5(a)(ii) 2 years + [($600 000 – $591 000) / $313 050 × 365] = 2 years (1) OF 11 days (2) OF 3
5(a)(iii) $ 5
2020 290 000
2021 301 000
2022 313 050
904 050
Total depreciation 600 000 (1)
Total profit 304 050 (1) OF
Average profit 101 350 (1) OF
($101 350 / $300 000*) (1) OF = 33.78% (1) OF
* = $600 000 / 2
5(b) Advantages: 4
Easy to compute (1)
Easy to understand (1)
Good for initial screening (1)
Good for business which requires short time to recover its investment (1)
Disadvantages:
Does not consider time value of money (1)
Does not consider cash flows after the payback period (1)
Projects may have different patterns of cash inflows (1)
Max 2 for advantages max 2 for disadvantages.
Accept other valid points.
5(c) Inflows PV 3
$
Year 0 1 (600 000) (600 000) (1)
Year 1 0.909 290 000 263 610 )
Year 2 0.826 301 000 248 626 ) (1) OF
Year 3 0.751 313 050 235 101 )
NPV 147 337 (1) OF
5(d) Machine X should be purchased (1) because it has a positive NPV (1) OF 5
The payback is less than the useful life of the machine (1) OF
The ARR is more than the cost of capital (1) OF
The quality of the product is better (1)
The maintenance costs should be lower than Machine B (1)
Machine X may have a positive environmental impact (1)
There may be additional training costs incurred with machine X (1)
1 mark for decision
Max 2 for financial factors
Max 2 for non-financial factors
Accept other valid points.
Other balances were:
1 January 2018 31 December 2018
$ $
Share premium 70 000 70 000
Retained earnings 74 000 ?
Inventory 78 105 ?
7 Non-current assets at 31 December 2018 were $505 272.
(b) Prepare the statement of financial position at 31 December 2018. (Cash at bank is the balancing figure.) [15]
(c) Calculate the price earnings ratio. [2]
Additional information
T plc, a major competitor of V plc, had the following information for the year ended
31 December 2018.
Gross margin 42%
Inventory turnover 65 days
(d) Assess the performance of V plc and T plc in terms of profitability and efficiency in managing inventory. [5]
[Total: 25]
Question 3
Source A3
The financial statements of W Limited for the year ended 31 December 2018 are ready to be audited.
The directors have provided the following assets balances from the statement of financial position.
$
Property, plant and equipment 682 000
Inventory 94 200
Trade receivables 87 400
Other receivables 9 430
Cash and cash equivalents 21 170
The following information is available.
1 Included in property, plant and equipment was equipment with a carrying value of $140 000. The fair value of the equipment was $132 000 and the value in use was $136 000.
2 The retained earnings for the year ended 31 December 2018 were $184 000. This is after deducting a proposed final dividend of $12 000.
3 The directors had budgeted to incur $25 000 advertising in 2019. A provision was made for this expenditure.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Explain one benefit of auditing. [2]
(b) Explain to the directors the appropriate accounting treatments for item 1, 2 and 3, making reference to the relevant International Accounting Standards (IAS). [7]
Additional information
The following information is also available.
1 A deposit of $3000 had been paid to a supplier for goods to be delivered in April 2019. This amount had been recorded as purchases.
2 Goods costing $5400 and with a sales value of $7000 were sent to a customer on sale or return basis. The directors had recorded $7000 as a sale. At 31 December 2018 the customer had not decided whether to buy the goods.
(c) Calculate the revised retained earnings at 31 December 2018 using all the information available. [6]
(d) Calculate the corrected figure for the following items for inclusion in the revised statement of financial position at 31 December 2018.
(i) Property, plant and equipment
(ii) Inventory
(iii) Trade receivables
(iv) Other receivables
(v) Total assets
[5]
Additional information
At the annual general meeting, some of the shareholders queried that the final dividend proposed by the directors was too low.
(e) Advise the directors whether or not they should increase the proposed dividend. Justify your answer by discussing benefits and drawbacks of your advice for both the company and the shareholders. [5]
[Total: 25]
Question 4
Source A4
Roberto and Sasha formed a joint venture. They sold sports equipment from a market stall in the month before a major sporting event took place in their hometown. They shared profits and losses equally.
The following transactions took place.
1 Roberto and Sasha introduced cash to open the joint venture bank account.
2 Sasha paid the rent on the stall.
3 Roberto paid for some fixtures to be used on the stall.
4 The joint venture bank account was used to buy inventory.
These transactions were recorded in the books of the joint venture.
The joint venture account and the joint venture bank account appeared as follows:
Joint venture account
$ $
June 1 Sasha 200
Roberto 120
Joint venture bank account 1700
Joint venture bank account
$ $
May 31 Roberto 1000 June 1 Joint venture account 1700
Sasha 1000
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Explain what took place on 31 May. [2]
(b) Explain why the transactions which took place on 31 May were not recorded in the joint venture account. [2]
Additional information
By the end of the month all the sports equipment was sold and sales had totalled $2500. Of this amount, $1800 was paid into the joint venture bank account. Roberto kept the remainder for personal use.
At the end of the month the fixtures were sold for $50 and the proceeds paid into the joint venture bank account.
The profit was then calculated and the bank account closed.
(c) Calculate the share of profit for each party to the joint venture. [3]
(d) Prepare the ledger accounts as they would appear in the books of the joint venture for:
(i) Roberto [5]
(ii) Sasha. [4]
Additional information
The major sporting event which took place will become an annual event. Both parties wish to repeat the joint venture but Roberto is insisting that the mark-up applied should be 75%.
(e) Advise Sasha whether or not she should agree to repeat the joint venture. Justify your answer using both financial and non-financial factors. [5]
(f) Explain how a business selling sports equipment differs from a sports club which also sells equipment to its members. [4]
[Total: 25]
Section B: Cost and Management Accounting
Question 5
Source B1
Gerry manufactures a product using Machine B. The following budgeted information is available in respect of this for the year ending 31 December 2019.
$
Total annual cash inflows from sales 800 000
Total annual cash outflows for cost of sales 416 000
Gerry has decided to purchase a new machine, Machine X, at a cost of $600 000, to replace Machine
B on 1 January 2020. The new machine will have a useful life of 3 years with no residual value. It is expected that Machine X will produce the following results:
1 Each year sales will be 5% more than the sales in the previous year.
2 Gross margin will increase by 2% in 2020 and this gross margin will then remain constant.
3 Machine maintenance costs will be:
$
2020 10 000
2021 20 000
2022 30 000
4 Other operating costs (excluding depreciation) will be $120 000 per year.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate for Machine X:
(i) the net cash flow for each year [5]
(ii) the payback period [3]
(iii) the accounting rate of return to two decimal places. [5]
(b) State two advantages and two disadvantages of using the payback method of investment appraisal. [4]
Additional information
Gerry’s cost of capital is 10%. The relevant discount factors are:
Year 1 0.909
Year 2 0.826
Year 3 0.751
(c) Calculate the net present value (NPV) of Machine X. [3]
(d) Advise Gerry whether or not he should purchase Machine X. Justify your answer using two financial and two non-financial factors. [5]
[Total: 25]
Question 6
Source B2
Ella uses flexible budgets as part of her budgetary control system. The following information is available for the year ended 31 March 2019.
Fixed budget Actual activity level activity level
Units 1000 3000 2500
$ $ $
Sales 25 000 75 000 63 000
Direct labour 5000 15 000 12 800
Direct material 6000 18 000 14 500
Semi-variable overheads 4000 7500 7250
Fixed costs 5000 5000 5200
Profit 5000 29 500 23 250
(a) State two advantages to a business of using a budgetary control system. [2]
(b) Calculate the flexed budgeted profit for the year ended 31 March 2019. [8]
(c) Prepare a statement, showing the relevant variances, to reconcile the flexed budget profit with the actual profit. [6]
Additional information
For the month of April 2019, Ella’s business showed a favourable total direct material variance and an adverse total direct labour variance.
(d) Suggest what may have caused the:
(i) favourable total direct material variance [2]
(ii) adverse total direct labour variance. [2]
(e) Advise Ella whether or not she should continue to flex the budgeted data. Justify your answer. [5]
[Total: 25]
Mark scheme
6(a) Allows targets to be set (1) 2
Helps to plan / control the use of resources (1)
Helps with decision-making (1)
Enables regular variance analysis (1)
Identifies limiting factors (1)
Informs all departments of a common goal (1)
Improves communication between managers and departments (1)
Improves co-ordination between departments (1)
Provides clear areas of responsibility (1)
Helps to motivate employees (1)
Max 2
Accept other valid points.
6(b) Workings: 8
Semi-variable overheads – using high / low method
$7500 – $4000 = $3500 = $1.75 (1) × 3000 units = $5250 variable cost
3000 units – 1000 units = 2000 units or × 1000 units = $1750
Total cost $7500 or $4000
less variable cost $5250 $1750
= fixed cost $2250 (1) OF $2250
Semi-variable overheads at actual level of activity
$1.75 × 2500 units = $4375 variable cost
$2250 fixed cost
Total semi-variable overhead $6625 (1) OF
Flexed
budget
$
Sales (25 000 / 1000) or
62 500 (1)
(75 000 / 3000) × 2500 units
Direct labour (5000 / 1000) or
12 500 (1)
(15 000 / 3000) × 2500 units
Direct material (6000 / 1000) or
15 000 (1)
(18 000 / 3000) × 2500 units
Semi variable overheads See separate working above 6625 (3) OF
Fixed costs 5000 (1)
Profit 23 375 (1) OF
6(c) $ $ 6
Profit from flexed budget 2500 units 23 375 (1) OF both profits
Add favourable variances:
Selling price 500 (1)
Direct material 500 (1)
24 375
Deduct adverse variances:
Direct labour 300 (1)
Semi-variable overheads 625 (1)
Fixed costs 200 (1) 1125
Actual profit 23 250
6(d)(i) Direct material favourable variance: 2
Material price could have been reduced (1) due to lower quality / decrease in market price / cheaper supplier. (1)
Material usage could be less (1) due to better quality material / less wastage / skilled workforce. (1)
1 mark for each element and 1 mark for development up to max 2
6(d)(ii) Direct labour adverse variance: 2
Direct labour may have worked more hours (1) due to poor quality materials / lower skilled workforce. (1)
Labour rate could be higher (1) due to more skilled workforce / overtime paid which wasn’t budgeted for. (1)
1 mark for each element and 1 mark for development up to max 2
6(e) Yes: 5
It reflects any changes in activity and is therefore more realistic / accurate / reliable (1)
It enables like for like / better comparisons (1)
It is easier to identify variances (1)
It enables a clearer understanding of the corrective action required (1)
No:
It can be time consuming (1)
It may be complex / need an expert / training to calculate the flexed budget. (1)
Managers may become de-motivated [if the target is constantly changing] (1)
Managers may resent having to re-calculate budgets on a regular basis (1)
Decision (1), Yes (max 2) and No (max 2)
Accept other valid points.
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