Accounting 9706/21 May/June 2020: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Structured Questions, May/June 2020. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Hamza and Noor are in partnership. They own a service business.
The following information has been extracted from the partnership’s books of account for the year ended 31 December 2019.
$
Administrative expenses 18 270
Equipment at 1 January 2019
Cost 11 000
Provision for depreciation 3 300
Loan account (Hamza) 10 000
Motor vehicle at 1 January 2019
Cost 20 000
Provision for depreciation 7 200
Revenue 45 400
Wages of assistant 15 540
The following information is also available.
1 Administrative expenses include $1800 insurance for the three months ended
29 February 2020.
2 The assistant works a 5-day week and is paid a weekly wage of $350. At 31 December 2019 three days’ wages were due but unpaid.
3 Hamza’s loan was provided on 1 April 2019. He is entitled to interest of 8% per annum. Loan interest has not yet been paid to Hamza.
4 The depreciation policy is:
Equipment 15% per annum straight-line method
Motor vehicle 20% per annum reducing balance method
A full year’s depreciation is charged in the year of purchase but none in the year of disposal.
5 An item of equipment was sold for $480 on 3 August 2019. This equipment had been purchased on 1 January 2017 for $2000.
REQUIRED
(a) State how profits and losses are shared in a partnership where there is no agreement.
…… [1]
(b) Explain two reasons why you would recommend partners to have a written agreement, other than stating a ratio for sharing profits and losses.
1 ……
2 ……
[4]
(c) Prepare the income statement for the year ended 31 December 2019.
Hamza and Noor
Income Statement for the year ended 31 December 2019
Workings:
[11]
Additional information
Hamza and Noor have an agreement about sharing profits and losses. Their agreement is as follows.
1 Noor is to be given a salary of $11 000.
2 Partners are allowed to have drawings of $14 000 per annum. Interest of 10% is charged on any drawings in excess of this amount.
3 Remaining profits and losses are to be shared in the ratio Hamza : Noor, 3 : 2.
The following balances were available.
$
Current account balances at 1 January 2019
Hamza 1 290 Debit
Noor 4 350 Credit
Drawings for the year ended 31 December 2019
Hamza 16 900
Noor 13 200
REQUIRED
(d) Prepare the appropriation account for the year ended 31 December 2019.
Hamza and Noor
Appropriation account for the year ended 31 December 2019
…… [4]
(e) Calculate the balance of Hamza’s current account at 31 December 2019.
…… [5]
Additional information
Hamza and Noor have been considering expanding their business which will require additional finance of $90 000. In order to finance the expansion they are considering two options.
Option 1: admit a new partner
Option 2: apply for a bank loan
REQUIRED
(f) Advise which option the partners should choose. Justify your advice.
…… [5]
[Total: 30]
Mark scheme
1(a) Profits and losses should be shared equally (1) among partners 1
1(b) Avoidance of disputes (1). The deed usually states management responsibilities (1) and also agreed limits on drawings 4
and agreed amounts of fixed capital (1). Ensure partners are properly rewarded (or penalised) for their contributions (1).
The deed may include rewards for partners who have undertaken more management responsibilities/provided more
capital/and penalised partners whose drawings have been the most (1)
Max 2 reasons (2 marks per reason, 1 mark for identifying + 1 mark for developing)
Accept other valid responses
1(c) Hamza and Noor 11
Income statement for year ended 31 December 2019
$ $
Revenue 45 400
Less:
Administrative expenses W1 17 070 (2)OF
Wages of assistant W2 15 750 (2)OF
Interest on loan from Hamza 600 (1)
Loss on disposal of equipment W3 920 (2)OF
Depreciation
Equipment W4 1 350 (2)OF
Motor vehicle 2 560 (1)
(38 250)
Profit for year 7 150 (1)OF
W1 Administrative expenses
$18 270 – $1 200 (1) = $17 070 (1)OF
W2 Wages of assistant
$15 540 + $210 (1) = $15 750 (1)OF
W3 Loss on disposal of equipment
$2000 – $600 = $1 400 (1) – $480 = $920 (1)OF $1 400 – 480 = loss $920
W4 Depreciation of equipment
15% × ($11 000 – 2 000) (1) = $1 350 (1)OF
1(d) Appropriation account for the year ended 31 December 2019 4
$ $
Profit for the year 7 150
Add interest on drawings
Hamza : 10% × $2 900 290 (1)
7 440
Less: salary (Noor) 11 000 (1)
(3 560)
Shares of residual loss
3
Hamza ( × $3 560) 2 136 (1)OF
5
2
Noor ( × $3 560) 1 424 (1)OF
5
(3 560)
1(e) Calculation of Hamza’s current account balance 5
$
Opening balance (dr) (1 290)
Add loan interest 600 (1)OF
Less interest on drawings (290) (1)OF
Less drawings (16 900) (1)
Less share of residual loss (2 136) (1)OF
Closing balance (20 016) (1)OF
Note: OF for closing balance only awarded if negative opening balance taken into account.
1(f) Advice (1) 5
Option 1 (maximum 2 marks)
Potential benefits
• Permanent source of finance/no security required (1)
• May bring new ideas/skills (1)
• Shared management responsibilities (1)
Potential drawbacks
• May not be possible to find a suitable partner (1)
• Risk of disagreements (1)
• Profits will have to be shared (1)
Option 2 (maximum 2 marks)
Potential benefits
• Profits still shared by the two partners (1)
• Fixed interest rate will aid planning (1)
Potential drawbacks
• Interest charges will reduce profits (1)
• May not be able to obtain bank loan (1)
• Have too little collateral to offer for size of loan (1)
Accept over valid responses
Ayesha has provided the following extracts from her business’s financial statements.
Extract from the Income Statement for the year ended 31 December 2019
$ $
Revenue 145 500
Opening inventory 11 440
Purchases 120 120
131 560
Closing inventory 14 560
Cost of sales 117 000
Gross profit 28 500
Extract from the Statement of Financial Position at 31 December 2019
$
Current assets
Inventory 14 560
Trade receivables 9 300
Cash and cash equivalents 4 240
28 100
Current liabilities
Bank overdraft 8 000
Trade payables 10 400
18 400
All purchases are on credit. Two-thirds of all sales are on a credit basis.
REQUIRED
(a) Calculate the following ratios. State the formula used.
(i) Trade payables turnover (in days)
Formula ……
Calculation ……
(ii) Trade receivables turnover (in days)
Formula ……
Calculation ……
(iii) Current ratio (to two decimal places)
Formula ……
Calculation ……
[6]
Additional information
Ayesha is concerned about her business’s liquidity. She has provided the following ratios based on the year ended 31 December 2018.
Trade payables turnover 34 days
Trade receivables turnover 32 days
Current ratio 1.90 : 1
(b) Analyse the trend in Ayesha’s business’s liquidity.
…… [7]
(c) State two factors that should be considered when choosing businesses with which to compare a business.
1 ……
2 ……
[2]
[Total: 15]
Mark scheme
2(a) (i) Trade payables turnover (in days) 6
Trade payables/Credit purchases × 365 (1)
10 400
× 365 = 32 days (1)
120120
(ii) Trade receivables turnover (in days)
Trade receivables/Credit sales × 365 (1)
9 300
× 365 = 35 days (1)
2
3 × 145 500
(iii) Current ratio
Current assets : current liabilities (1)
28 100:18 400 = 1.53:1 (1)
2(b) • She is paying trade payables more quickly than before (1) – by 2 days (1)OF 7
• Trade receivables are paying more slowly than before (1) – by 3 days (1)OF
• Trade payables used to be paid more slowly than trade receivables paid Ayesha; now the position is reversed (1) –
there was a favourable gap of 2 days, now the gap is adverse by 3 days (1)
• The current ratio has weakened so that the business will it more difficult than before to meet its immediate
obligations (1)
• A bank loan is due for repayment within the next twelve months. The business may find it difficult to meet the
repayment date (1). If this obligation cannot be met the business is at risk of assets being seized (1)
Max 7
Accept other valid points.
2(c) Same type of ownership (1) 2
Same trade (1)
Similar size (1)
Same business cycle (1)
Max 2 marks
Accept other valid responses
Jason is responsible for preparing his business’s accounting records. He has discovered some errors in this year’s accounts.
REQUIRED
(a) State two types of error which do not affect the agreement of the totals of a trial balance.
1 ……
2 ……
[2]
Additional information
When Jason prepared a trial balance on 30 September 2019 the totals did not agree. The total of debit entries was greater than the total of credit entries by $1140. A suspense account was opened for the difference. Subsequently the following errors were found.
1 The total of the sales returns journal was undercast by $90.
2 The owner had withdrawn inventory valued at cost, $870. The only entry made was to debit the drawings account.
3 The total of the discount received column in the cash book, $180, had been debited to the discounts allowed account.
There were no other errors.
REQUIRED
(b) Prepare entries in the general journal to correct these errors. Narratives are not required.
General Journal
Dr Cr
$ $
1
2
3
[5]
(c) Prepare the suspense account.
Suspense Account
$ $
[4]
Additional information
The business’s draft profit for the year ended 30 September 2019 was $68 440 before taking account of the errors.
REQUIRED
(d) Calculate the corrected profit for the year ended 30 September 2019.
…… [4]
[Total: 15]
Mark scheme
3(a) Commission (1) 2
Reversal (1)
Omission (1)
Principle (1)
Original entry (1)
Compensating (1)
Max 2
3(b) 5
General Journal
Dr Cr
$ $
1 Sales returns 90
(1)
Suspense 90
2 Suspense 870
(1)
Purchases 870
3 Suspense 360 (1)
Discounts allowed 180 (1)
Discounts received 180 (1)
3(c) 4
Suspense Account
$ $
Purchases 870 (1) Difference in TB totals 1 140 (1)
Discounts allowed 180 Sales returns 90 (1)
(1)
Discounts received 180
1 230 1 230
Do not accept a single debit entry for $360 in a discounts account.
3(d) Corrected profit for year ended 30 September 2019 4
$
Draft profit 68 440
Less sales returns (90) (1)
Add reduction in purchases 870 (1)
Add change to discounts 360 (1)OF
Corrected profit 69 580 (1)OF
G Limited manufactures cakes for celebrations. The company uses absorption costing.
REQUIRED
(a) Explain three benefits to a business of using absorption costing.
1 ……
2 ……
3 ……
[6]
Additional information
There are two production departments: baking and decoration.
There are two service departments: stores and maintenance.
Some overheads have already been allocated. The following forecast information is available for the year ending 31 December 2020.
Budgeted overheads to be apportioned
$
Machinery depreciation 33 600
Power 45 500
Lighting and heating 18 000
Baking Decoration Stores Maintenance department department department department
Floor space (m2) 4 100 2 300 600 200
Kilowatt hours 22 000 9 000 1 000 3 000
Machinery (net book value) ($) 33 000 10 000 4 000 9 000
Number of employees 14 29 4 5
Issues from stores 64% 24% 12%
Budgeted maintenance hours 2 500 1 800
Budgeted machine hours 86 400 37 600
Budgeted labour hours 26 300 51 000
REQUIRED
(b) Complete the table to show the apportionment of overheads and the reapportionment of the service department overheads using suitable bases.
Total Baking Decoration Stores Maintenance department department department department
$ $ $ $ $
Budgeted overheads
57 620 38 530 14 150 2 800 2 140 already allocated
Machinery depreciation 33 600
Power 45 500
Lighting and heating 18 000
Total overheads 154 720
Reapportionment of first service department overheads
Subtotal
Reapportionment of second service department overheads
Total overheads
[7]
(c) Calculate the overhead absorption rate, to two decimal places, for each production department using an appropriate basis.
Baking department
Decoration department
[4]
(d) State two possible reasons why overheads may be under absorbed.
1 ……
2 ……
[2]
Additional information
D Limited, a competitor of G Limited, makes a single product. The factory has the capacity to make 850 units per month. Overtime working is not available at this factory.
The following information is available for each unit of production and is based on operating at full capacity.
$
Selling price 49
Direct labour 16
Direct materials 9
Fixed costs 12
In April 2020 the factory was planned to operate at 80% capacity.
The directors of D Limited have received an offer from Wendy to supply 280 units at $45 per unit.
Wendy stated that the offer would depend on the entire order of 280 units being supplied.
REQUIRED
(e) Calculate the profit for the month of April if the offer from Wendy is accepted.
…… [6]
(f) Advise the directors whether or not they should accept the offer from Wendy. Justify your answer.
…… [5]
[Total: 30]
Mark scheme
4(a) • Takes account of fixed costs when determining product cost (1); as a result is useful in setting a selling price for a 6
product (1).
• Avoids separating fixed costs from variable costs (1) which can be difficult and so lead to inaccuracies (1)
• As it takes account of all costs it conforms to the matching principle (1) which requires costs to be matched to
revenues for a period (1)
• As it takes account of all costs (1) it is the recognised method for inventory valuation (1)
Max 3 advantages
Each advantage 1 mark for main point + 1 mark for development.
Accept other valid responses.
4(b) 7
Total Baking Decoration Stores Maintenance
department Department
$ $ $ $
Budgeted overheads already apportioned 57 620 38 530 14 150 2 800 2 140
Machinery depreciation 33 600 19 800 6 000 2 400 5 400 (1)
Power 45 500 28 600 11 700 1 300 3 900 (1)
Lighting and heating 18 000 10 250 5 750 1 500 500 (1)
Total overheads 154 720 97 180 37 600 8 000 11 940
Reapportionment of first service 5 120 1 920 (8 000) 960 (1)OF
department overheads
Subtotal 102 300 39 520 -- 12 900
Reapportionment of second service 7 500 5 400 -- (12 900) (1)OF
department overheads
Total overheads 109 800 44 920 -- --
(1)OF (1)OF
4(c) Overhead absorption rates 4
$109 800
Baking department: = $1.27 per machine hour (1)OF
86 400 (1)
$44 920
Decoration department: = $0.88 per labour hour (1)OF
51000 (1)
4(d) Overheads may be under-absorbed because: actual overheads exceed forecast overheads (1); actual production is less 2
than forecast production (1) calculation error (1).
Max 2
Accept other valid responses
4(e) Profit when offer is accepted 6
Contribution from usual production: $49 – 25 = $24 (1)
Contribution from offer: $45 – 25 = $20 (1)
Fixed costs are: $12 × 850 = $10 200
Contribution from usual production: 570 units × $24 = $13 680 (1)OF
Contribution from offer: 280 × $20 = $5 600 (1)OF
Profit: Contribution $19 280 – $10 200 (1) = $9 080 (1)OF
4(f) Advice (1) 5
Accept the offer
The company will make more profit in April than had been forecast (1).
Profit in April would have been: (680 units × $24)(1) – $10 200, i.e. $6 120 (1)
The company will be in full production (1) avoiding cancellation of orders for materials which might cause a deterioration
in relationships with suppliers (1), avoiding laying off staff which could affect morale (1), avoiding machinery lying idle
which could affect their efficiency (1)
Max 2 marks
Accept other valid points.
Not accept the offer
The company will have to reduce its usual output (1) which could mean that some regular customers’ orders are not
fulfilled (1) leading to a possible long-term loss of their custom (1) and a loss of profit if the special offer is not repeated
(1).
4(f) The directors need to consider whether the order can be produced to the quality expected (1), whether the labour force
have the appropriate skills for the products if they vary from the normal output (1) and whether the machinery is capable
of producing the products if they vary from the normal output (1).
Max 2 marks
Accept other valid points.
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