Accounting 9706/32 May/June 2020: question paper and mark scheme

Mark scheme

1(a) Responses could include: 3 Investors can better understand • the ability of a business to generate cash from operating activities (1) • ability of business to raise cash from external sources (1) • the causes of changes in net cash flows (1) • whether the business can generate enough cash to buy non-current assets, paying tax and dividend (1) • statement of cash flows is more objective, preparing on the basis of actual cash received and paid, unlike income statement and statement of financial position which involves accounting policies whereas some items are based on estimation. (1) Max 3 Accept other valid points 1(b) $ 5 Retained earnings 31 Dec 2019 61 700 } Retained earnings 31 Dec 2018 (88 200) }(1) Interim dividend 24 000 (1) Tax charge 3 100 (1) Interest 4 800 (1) Profit from operations 5 400 (1) 1(c) $ 7 Profit from operations 5 400 OF Depreciation W1 99 750 (3) Profit on disposal of asset (1 300) (1) Decrease in inventory 9 950 ) Increase in trade receivables (10 800) )(1) Increase in trade payables 1 500 ) Decrease in accrued expenses (2 300) )(1) Cash from operations 102 200 (1)OF W1 Depreciation: Plant and machinery (225 000 + 180 000 – 344 250) = 60 750 (1) 39 000 + 60 750 = 99 750 (1) CF Motor vehicles (136 000 – 7000 – 90 000) = 39 000 (1) To be awarded the (1)OF for cash from operations, the opening figure must be from 1(b). 1(d)(i) $ 3 Net cash from operations 102 200 OF Tax paid (5 200) (1) Interest paid (2 200) (1) Net cash from operating activities 94 800 (1)OF To be awarded the (1)OF for net cash from operating activities, the opening figure must be from 1(c). 1(d)(ii) $ 2 Loan received 80 000 (1) Dividend paid (24 000) (1) Net cash from financing activities 56 000 1(e) Response could include: 5 • paying out constant dividends may strengthen the value of shares (1) • poorer cash position, i.e. bank overdraft $8500 at 31 December 2019 has increased (1) • bank loan already $80000 obtained in 2019 (1) • dividends are paid out of retained earnings of previous years (1) • if P plc does not earn good profit in 2020, paying out cash dividends will further reduce the liquidity (1) • can pay bonus shares instead of cash dividend (1) 1 mark for decision plus Max 4 marks for justification. Accept other valid points.

Mark scheme

2(a) $ 6 Goodwill 50 000 (1) Plant and equipment 55 860 (1) Inventory 13 125 (1) Trade receivables 23 670 (1) Trade payables (14 950) 127 705 Capital in new partnership (100 000) } Loan to new partnership (20 000) }(1) Balance payable to Raj 7 705 (1) 2(b) $ 12 2(b) Non-current assets Plant and equipment 486 860 (1) Current assets Inventory 60 325 } Trade receivables 76 470 }(1) Cash at bank (13 600 – 7705) 5 895 (1)OF 142 690 Total assets 629 550 Capital account W1 Amir 277 500 (2) Ishan 185 000 (2) Raj 87 500 (1) 550 000 (1) Current account Amir 11 100 ) Ishan (3 800) )(1) 7 300 Loan from Raj 20 000 (1) Current liabilities Trade payables 52 250 (1) Total equity and liabilities 629 550 W1 Capital accounts Amir Ishan Raj $ $ $ Balance 300 000 200 000 100 000 Goodwill 15 000 (1) 10 000 (1) Goodwill (37 500) (1) (25 000) (1) (12 500) (1) 277 500 185 000 87 500 2(c) Responses could include: 4 • interest rate is lower (1) as Raj will probably demand less than the market rate (1) • no need to submit financial statements (1) obtaining the loan will be quicker (1) • no security required (1) so business assets will not be tied up in a loan (1) • trust among the partners (1) as it is flexible to pay to Raj in case the business does not perform well (1) 1 mark for stating a reason up to a Max of 2 reasons, plus further 1 mark for development for each reason. Accept other valid points 2(d) Responses could include: 3 • same field and same knowledge/expertise (1) • international working experience (1) • bring additional capital (1) • may dilute the ownership (1) • may dilute the control (1) • already merge with Raj (1) • share the profit (1) • share the loss (1) 1 mark for decision and Max 2 marks for justification Accept other valid points

Mark scheme

3(a) $ $ 4 Shop takings (49 200 + 870) 50 070 (1) Opening inventory 1 300 Purchases (15 100 + 2810 – 2740) 15 170 (1) Closing inventory 1 100 15 370 Gross profit 34 700 (1)OF Shop wages 18 700 Shop expenses 9 400 Shop profit for the year 6 600 (1)OF 3(b) $ 5 Subscriptions (78 650 + (1200 – 1600)(1) + (1900 – 400)(1) 79 750 Shop profit 6 600 (1)OF 86 350 Administrative expenses 78 600 Depreciation 40000x20% 8 000 (1) Deficit for the year (250) (1)OF 3(c) $ 3 Bank 9 850 Shop inventory 1 300 Members' subscriptions due 1 600 Club equipment - at cost 40 000 Club equipment - accumulated depreciation (32 000) Shop trade payables (2 740) Subscriptions in advance (1 200) Accumulated fund at 1 January 2019 16 810 (1) Deficit for the year (250) (1)OF Accumulated fund at 31 December 2019 16 560 (1)OF 3(d) 4 Financial statements of a limited company Financial statements of a not-for profit organisation income statement, statement of financial position and income and expenditure account and statement of financial statement of cash flows position profit or loss for the year excess of income over expenditure or excess of expenditure over income equity accumulated fund prepared on the basis of trial balance prepared on the basis of receipts and expenditure account Accept any other reasonable alternatives. 1 mark for each pair of differences up to a max of 4 3(e) Responses could include: 4 • bank balance is only $16 770 ($15 900 + $870) (1) • the club must replace the club equipment which is at the final year of the useful life (1) • no other assets such as investments which are easily convertible into cash (1) • do not have enough cash to replacement club equipment (1) • may ask for credit/payable by instalments/bank loan/members’ contribution (1) Max 4 Accept other valid points 3(f) Responses could include: 5 • subscriptions fee are recurring and club equipment is once and for all (1) • members may leave the club (1) • members are not obliged to subscribe more (1) • members’ donations (1) • bank loans – finance cost and collateral required (1) • alternative source of finance could be interest free loans from members (1) Max 4 for comments, plus further 1 mark for decision Accept other valid points

Mark scheme

4(a) $ 4 Equity W1 560 000 (1) Non-current liabilities W2 80 000 (1) Current liabilities W3 140 000 (1) 780 000 (1) W1 $640 000 – $80 000 = $560 000 W2 $780 000 – $140000 = $640 000 $640 000 × 12.5% = $80 000 W3 $224 000 ÷ 1.6 = $140 000 4(b) $ 3 Draft profit from operations W1 144 000 (1) Interest W2 (4 000) (1)OF Draft profit for the year 140 000 (1) W1 $640 000 × 22.5% = $144 000 W2 $80 000 OF × 5% = $4000 4(c) Ordinary Share General Retained 10 shares premium reserve earnings $ $ $ $ At 1 January 2019 200 000 35 000 21 000 80 000 (1)OF New issue 100 000 (1) 40 000 (1) Dividend paid (56 000) W1 (1) Draft profit for the year 140 000 (1)OF Bonus issue of shares 50 000 (1) (50 000) (1) Transfer to reserve 350 000 25 000 18 000 } (18 000) }(1) At 31 December 2019 350 000 25 000 (1) 39 000 146 000 W2 (1)OF W1 $140 000 ÷ 2.5 = $56 000 W2 $560 000 – $350 000 – $25 000 – $39 000 = $146 000 4(d) Adjusting events are those that provide evidence of conditions that existed at the end of the reporting period. (1) 4 The entity should adjust the amounts recognised in its financial statements. (1) Non-adjusting events are those events after reporting period that are indicative of conditions that arose after the end of the reporting period. (1) The entity should not adjust the amounts recognised in its financial statements. (1) 4(e) Responses could include: 4 • Adjusting events (1) • Arising from the sales in 2019 (1) • Trade receivables existed at 31 December 2019 (1) • Evidence of assets at 31 December 2019 being impaired (1) • Prudence concept (1) • Accounting treatment : should be written off / recognised in the financial statements of 2019 1 mark for each valid point up to a maximum of three plus further 1 mark for explaining accounting treatment

Mark scheme

5(a) Master Flexed 7 budget budget Actual $ $ $ Direct materials 60 000 (1) 57 600 (1) 68 340 Direct labour 160 000 (1) 153 600 (1) 156 864 Fixed overheads 48 000 (1) 46 080 (1) 49 800 Total costs 268 000 257 280 275 004 (1) 5(b)(i) Direct materials variance 1 $68 340 – $57 600 10 740 A (1)OF Must be the difference between actual and flexed budget 5(b)(ii) Direct materials price variance 4 $68 340 – (8040 × $8) or ($8.5 – $8) × 8040 4020 A (1) pay more per kilo (1) Direct materials usage variance (2400 × 3 – 8040) × $8 6720 A (1) use more materials (1) 5(c)(i) Direct labour variance 1 $156 864 – $153 600 3264 A (1)OF Must the difference between actual and flexed budget 5(c)(ii) Direct labour rate variance 4 $156 864 – (9120 × $16) 10944 A (1) pay more per hour (1) or ($17.2 – $16) × 9120 Direct labour efficiency variance (2400 × 4 – 9120) × $16 7680 F (1) use fewer labour hour (1) 5(d)(i) Total fixed overheads variance 1 $49 800 – $46 080 3720 A (1) 5(d)(ii) Fixed overheads expenditure variance 1 $49 800 – $48 000 1800 A (1) 5(d)(iii) Fixed overheads volume variance 1 $48 000-$46 080 1920 A (1) 5(e) Responses could include: 5 • responsibility accounting : manager is only responsible for anything that is under his/her control (1) • production manager is only responsible for the production process (1) • production is not responsible for the purchases of raw materials (1) • delay in supply of materials has an effect on delay in production (1) • production manager is responsible for the efficiency of direct labour, not the rate which is not under his control, i.e. inflation or bargaining power of labour union (1) • ensuring the stable supply of raw materials should be the responsibility of the manager of purchasing department (1) Max 4 for comments, plus further 1 mark for decision Accept other valid points

Mark scheme

6(a) March April 13 $ $ Opening balance 39 400 25 140 Receipts Cash sales 84 000 W1 (1) 90 000 W2 (1) Credit sales - with cash discount 22 230 W3 (1) 23 940 W4 (1) Credit sales no cash discount January sales 86 400 W5 (1) February sales 192 630 93 600 W6 (1) Total receipts 192 630 207 540 Payments Suppliers 72 000 W7 (1) 76 800 W8 (1) Wages Current month 67 200 71 680 W9 (1) both Previous month 15 680 16 800 W10 (1) both Other overheads 52 010 52 010 (1) both Purchase of machinery 206 890 36 000 (1) Total payments 206 890 253 290 Ending balance 25 140 (20 610) (1)OF 6(a) Workings Cash sales W1 2800 × 40% × $75 84 000 W2 3000 × 40% × $75 90 000 Credit sales – with cash discount W3 2600 × 60% × 20% × $75 × 95% 22 230 W4 2800 × 60% × 20% × $75 × 95% 23 940 Credit sales – no cash discount W5 January sales 2400 × 60% × 80% × $75 86 400 W6 February sales 2600 × 60% × 80% × $75 93 600 Payment for purchases W7 3000 × 3 × $8 72 000 W8 3200 × 3 × $8 76 800 Wages – current month W9 March production 3000 × $28 × 80% 67 200 April production 3200 × $28 × 80% 71 680 Wages – previous month W10 Feb production 2800 × $28 × 20% 15 680 March production 3000 × $28 × 20% 16 800 6(b) Responses could include: 4 • to identify cash deficit and surplus during the month and decide any necessary action to be taken (1) to enable appropriate planning to source other funds or make investments (1) • co-ordinate cash inflows and outflows (1) • determine the time of capital expenditure (1) depending on resources available (1) • evaluate actual performance with budgeted flows (1) • to identify the cash balance or overdraft at the end of each month (1) 1 mark for identifying each purpose up to a Max of 2 marks, plus further 1 mark for explanation/development for each purpose. Accept other valid points. 6(c) $ 4 Other overheads 56 210 (1) Additional depreciation 600 (1) 56 810 Break-even 56 810/$23 = 2470 units (1) Budgeted sales for April = 3000 units. Therefore, T Limited can exceed breakeven in April. (1) 6(d) Responses could include 4 • sales and cash receipts have different timing (1) • purchases and payment for purchases have different timing (1) • expenses incurred and actual payments have different timing (1) • calculation of the breakeven point does not take into account capital expenditure (1) • calculation of the breakeven point includes non-cash item such as depreciation (1) • businesses making sales more than the breakeven point in a month does not necessarily mean that there is cash surplus in that month (1) Max 4 Accept other valid points