Accounting 9706/22 May/June 2021: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Structured Questions, May/June 2021. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
N Limited is a trading business. Sales are made on the credit basis only.
The following information was available at 31 December 2020.
Debit Credit
$000 $000
8% Debentures (2025) 250
Administrative expenses 171
Cash and cash equivalents 14
Cost of sales 466
Debenture interest 8
Distribution costs 63
Dividends paid 80
Inventory at 31 December 2020 33
Issued capital:
Ordinary shares of $0.25 each at 31 December 2020 500
Non-current assets
Cost 1140
Provision for depreciation at 1 January 2020 140
Retained earnings at 1 January 2020 129
Revenue 923
Share premium at 31 December 2020 70
Trade payables 42
Trade receivables 79
2054 2054
The following information is also available at 31 December 2020.
1 Administrative expenses included insurance of $16 000 for four months ended
31 January 2021.
2 Depreciation should be provided on non-current assets at 25% per annum using the reducing balance method. Depreciation charges should be allocated 20% to distribution costs and 80% to administrative expenses.
3 The account of a credit customer, $3000, should be written off to administrative expenses as an irrecoverable debt.
4 Debenture interest was outstanding for the second half of the year. The directors had issued additional debentures of $50 000 on 1 October 2020.
REQUIRED
(a) Prepare the company’s income statement for the year ended 31 December 2020.
N Limited
Income statement for the year ended 31 December 2020
$000
Workings:
Distribution costs
Administrative expenses
Finance costs
[10]
Additional information
On 1 July 2020 the directors had decided to make a rights issue of two ordinary shares for every three shares held at a price of $0.30 per share. The rights issue was fully subscribed.
REQUIRED
(b) Explain two reasons why a company may make a rights issue of shares rather than an issue of debentures.
1 ……
2 ……
[4]
(c) Calculate the amount raised by the rights issue.
…… [4]
(d) Prepare a statement of changes in equity for the year ended 31 December 2020.
N Limited
Statement of changes in equity for the year ended 31 December 2020
Ordinary share Share Retained Total capital premium earnings
$000 $000 $000 $000
Balance at
1 January 2020
[5]
Additional information
The directors are concerned about the company’s credit control and wish to improve the company’s liquidity position. They are considering a proposal to offer a 5% cash discount to customers for settlement within 30 days on all invoices of more than $2000.
REQUIRED
(e) Identify two ratios which can be used to assess the liquidity of a business.
1 ……
2 ……
[2]
(f) Advise the directors whether or not they should go ahead with this proposal. Justify your answer.
…… [5]
[Total: 30]
Mark scheme
1(a) N Limited 10
Income statement for the year ended 31 December 2020
$000
Revenue 923
Cost of sales (466)
Gross profit 457 (1)
Administrative expenses W1 (370) (4)OF
Distribution costs W2 (113) (2)OF
Loss from operations (26) (1)OF
Finance costs (17) (1)
Loss for the year (43) (1)OF
Workings
W1 171 + 200 (1) – 4 (1) + 3 (1) = $370 (1)OF
W2 63 + 50 (1) = $113 (1)OF
1(b) Sample responses 4
1 mark
Rights issue is a permanent source of capital (1)
2 marks
Rights issue is a permanent source of capital (1) whereas debentures are a liability that must be repaid at a future date (1)
3 marks
Rights issue is a permanent source of capital (1) on which dividends are paid (1) whereas debentures are a liability that
must be repaid at a future date (1)
4 marks
Rights issue is a permanent source of capital (1) on which dividends are paid (1) whereas debentures are a liability that
must be repaid at a future date (1) with interest which will reduce profits (1)
Accept other valid responses.
1(c) $240 000 (4) 4
Working
Rights issue 2 000 000 shares (1) × 2/5 (1) = 800 000 shares (1OF) × $0.30 = $240 000 (1)OF
1(d) N Limited 5
Statement of changes in equity
for the year ended 31 December 2020
Ordinary Share Retained Total
share capital premium earnings
$000 $000 $000 $000
Balance at 300 30 129 459
1 January 2020
(1) for both
Rights issue of 200 40 240
shares
(1)OF for both
Loss for year (43) (43)
(1)OF
Dividend paid (80) (80)
(1)
Balance at 31 500 70 6 576
December 2020 (1) OF
for row &
column
1(e) Current ratio (1) 2
Liquid (acid test) ratio (1)
1(f) For proposal (Max 2) 5
• May improve cash flows/liquidity/as customer may pay more quickly (1)
• May encourage larger orders (1)
• May make irrecoverable debts less likely (1)
Against proposal (Max 2)
• Will reduce profits by the amount of discounts allowed (1), (and company is already making a loss) (1)
• Will also reduce cash receipts (1)
• Possible loss of customers who do not qualify for cash discount (1)
Advice (1)
Accept other valid responses.
Zak owns a wholesale business. He makes sales on credit.
REQUIRED
(a) Explain why it may be important for a business to maintain a provision for doubtful debts.
…… [2]
Additional information
Zak has prepared an aged schedule of trade receivables at 31 December 2020.
Amount Estimated
Period outstanding
$ irrecoverable debts
Less than 1 month 34 200 1%
Between 1 month and 3 months 6 680 5%
Between 4 and 6 months 2 130 10%
In addition, two accounts had been outstanding for over 6 months.
$
P Limited 340
Q Limited 510
Zak’s policy is to write off as irrecoverable any amounts outstanding for more than 6 months.
Zak updates the provision for doubtful debts at each financial year end based on the estimated percentage of irrecoverable debts.
REQUIRED
(b) Prepare a journal entry to write off the irrecoverable debts. A narrative is not required.
Journal
Dr Cr
$ $
[2]
(c) State two ways in which the risk of irrecoverable debts may be reduced.
1 ……
2 ……
[2]
Additional information
At 1 January 2020 the business had a provision for doubtful debts of $980.
REQUIRED
(d) Calculate the adjustment required to the provision for doubtful debts at 31 December 2020.
…… [4]
(e) Prepare the provision for doubtful debts account for the year ended 31 December 2020.
Provision for doubtful debts account
$ $
[3]
(f) State two factors that should be taken into account when setting a provision for doubtful debts.
1 ……
2 ……
[2]
[Total: 15]
Mark scheme
2(a) To avoid overstating profit/current assets/trade receivables (1) – prudence concept (1) 2
To match costs with revenue (1) – accruals/matching concept (1)
Max 2
Accept other valid responses.
2(b) Journal 2
Dr Cr
$ $
Irrecoverable debts 850 (1)
(Trade receivable): P Limited 340
(1)
(Trade receivable): Q Limited 510
2(c) • Reduce credit sales (1) 2
• Better credit control (1)
• Regular telephone contact with customers (1)
• Credit checks on customers (1)
• Issue regular statements of account/invoices (1)
• Setting credit limits for customers (1)
• Stop supply to late paying customers (1)
Max 2
Accept other valid responses.
2(d) ($91) decrease (4) 4
Working
$ $
Existing provision 980
Outstanding less than 1 month: 1% × $34 200 342 (1)
Outstanding 1–3 months: 5% × $6 680 334 (1)
Outstanding 4–6 months 10% × $2 130 213 (1)
889
Decrease in provision 91 (1)OF
2(e) Provision for doubtful debts account 3
$ $
Income statement 91 (1)OF Balance b/d 980 (1)
Balance c/d 889
980 980
Balance b/d 889 (1)OF
2(f) • Amount of trade receivables (1) 2
• Past experience of irrecoverable debts (1)
• State of the economy (1)
• Specific knowledge of credit customers (1)
• Age of the debts (1)
Max 2
Accept other valid responses.
Jason prepared the following statement of financial position which contained errors.
Statement of financial position at 31 December 2020
$ $
Non-current assets
Cost 65 000
Provision for depreciation 31 000
34 000
Current assets
Inventory 17 390
Trade receivables 14 800
Other payables 700
Bank overdraft 490
33 380
67 380
Capital
Opening balance 56 950
Profit for the year 11 270
Drawings (18 450)
49 770
Non-current liabilities
Bank loan (repayable March 2021) 4 900
Current liabilities
Provision for doubtful debts 480
Other receivables 490
Trade payables 11 360
12 330
67 000
In addition to some items being recorded in the incorrect sections of the statement of financial position, the following errors have also been discovered.
1 Closing inventory had been overvalued by $510.
2 The balance of the rent receivable account, debit $220, had been included in other payables in the statement of financial position.
3 Depreciation at 20% per annum had been charged using the straight-line method instead of the reducing balance method at 20% per annum.
4 The balance of the drawings account had been understated by $580.
REQUIRED
(a) Calculate the revised profit for the year ended 31 December 2020.
…… [5]
(b) Prepare the corrected statement of financial position at 31 December 2020.
Corrected statement of financial position at 31 December 2020
$ $
[7]
(c) Identify three types of error which do not affect the balancing of the trial balance.
1 ……
2 ……
3 ……
[3]
[Total: 15]
Mark scheme
3(a) $14 360 (5) 5
Workings
$
Draft profit for the year 11 270
Less: overvalued inventory (510) (1)
Add: decrease in provision for depreciation (W) 3 600 (3)OF
Revised profit for the year 14 360 (1)
W
Incorrect charge for the year 20% × $65 000 = $13 000
Provision at beginning of year ($31 000 – $13 000) = $18 000
Net book value at beginning of year ($65 000 – $18 000) = $47 000
Correct depreciation charge for the year ($47 000 × 20%) i.e. $9 400
Decrease in depreciation charge: $13 000 (1) – $9 400 (1) = $3 600 (1)OF
3(b) Corrected statement of financial position at 31 December 2020 7
$ $
Non-current assets
Cost 65 000
Provision for depreciation 27 400
37 600 (1)OF
Current assets
Inventory 16 880 (1)
Trade receivables 14 320 (1)
Other receivables 710 (1)
31 910
Total assets 69 510
Capital
Opening balance 56 950
Profit for year 14 360
Drawings (19 030) (1)
52 280
3(b)
Current liabilities
Bank loan (2021) 4 900
Other payables 480 (1)
Trade payables 11 360
Bank overdraft 490
17 230 (1)
Total capital and liabilities 69 510
3(c) Errors of: 3
• commission (1)
• principle (1)
• omission (1)
• complete reversal (1)
• compensating (1)
• original entry (1)
Max 3
T Limited manufactures goods at two factories: Factory A and Factory B.
Factory A
Factory A has two production departments, Assembly and Finishing; and two service departments,
Administration and Canteen.
Absorption costing is used at this factory.
Budgeted overheads for February 2021 have already been apportioned.
The basis for reapportioning the service department overheads is as follows:
Production departments Service departments
Assembly Finishing Administration Canteen
Canteen 50% 40% 10% -
Administration 75% 25% - -
REQUIRED
(a) Prepare a statement showing the reapportionment of service department overheads for
February 2021.
Production departments Service departments
Assembly Finishing Administration Canteen
$ $ $ $
Overheads 83 500 70 100 28 300 15 400
Reapportionment of canteen
Subtotal
Reapportionment of administration
Total overheads
[4]
Additional information
Assembly Finishing
Direct labour hours per month 1700 1400
Machine hours per month 2800 900
Direct labour rate per hour $8.40 $8.20
REQUIRED
(b) Calculate the overhead absorption rate for each production department to two decimal places.
Assembly department
Finishing department
[4]
Additional information
The company received an order from a customer. The following details are available:
Direct materials $1880
Direct labour:
Assembly department 11.5 hours
Finishing department 6.1 hours
Machine hours:
Assembly department 5.7 hours
Finishing department 2.4 hours
The company’s policy is to achieve a profit of 40% on selling price.
REQUIRED
(c) Prepare a statement to show the total selling price that T Limited will quote to the customer.
…… [7]
(d) State two possible causes of under absorption of overheads.
1 ……
2 ……
[2]
(e) State what is meant by
(i) allocation of overheads
…… [1]
(ii) apportionment of overheads
…… [1]
Additional information
Factory B
T Limited manufactures a single product in Factory B.
Marginal costing is used at this factory.
The following information is available for December 2020 when production was 9000 units which included 1000 units produced using overtime.
$
Direct materials 72 000
Direct labour 74 000
Other variable costs 22 500
Fixed costs 65 000
Total costs 233 500
Direct labour overtime is paid at 1.25 times the normal rate.
All production was sold at $30 per unit.
The directors have been considering changing the supplier of materials. The following information is available.
1 An overseas supplier is prepared to become the company’s sole supplier of materials at $5.50 per unit including delivery costs.
2 The supplier can only provide sufficient materials for the company to make 7600 units per month.
3 The directors do not expect any other costs or the unit selling price to change. All production will be sold.
REQUIRED
(f) Calculate the maximum profit per month that can be made if materials were obtained from the overseas supplier and production limited to 7600 units.
…… [4]
(g) Advise the directors whether or not they should change the supplier. Justify your advice by considering both financial and non-financial factors.
…… [7]
[Total: 30]
Mark scheme
4(a) 4
Production Service departments
departments
Assembly Finishing Administration Canteen
$ $ $ $
Overheads 83 500 70 100 28 300 15 400
Reapportion service 7 700 6 160 1 540 (15 400) (1) for row
department
Subtotal 91 200 76 260 29 840 - (1)OF for row
Reapportion service 22 380 7 460 (29 840) - (1)OF for row
department
Total overheads 113 580 83 720 - - (1)OF for row
4(b) 4
Assembly $113 580/2 800 $40.56 (1)OF per machine hour (1)
Finishing $83 720/1 400 $59.80 (1)OF per labour hour (1)
4(c) 7
$
Direct materials 1 880
Direct labour
Assembly department 11.5 × $8.40 96.60 (1)
Finishing department 6.1 × $8.20 50.02 (1)
Overheads
Assembly department 5.7 × $40.56 (OF) 231.19 (1)OF
Finishing department 6.1 × $59.80 (OF) 364.78 (1)OF
2 622.59 (1)OF
Profit 40% × Selling price 1 748.39 (1)OF
4 370.98 (1)OF
4(d) Overheads are more than budgeted (1) 2
Actual production is less than budgeted (1)
4(e)(i) Allocation: where overheads can be directly attributed to a cost centre (1) 1
4(e)(ii) Apportionment: where it is necessary to divide costs between cost centres on some appropriate basis (1) 1
4(f) $41 400 (4) 4
Workings
$
Revenue 7 600 × $30 228 000
Direct material 7 600 × $5.50 (41 800)
Direct labour 7 600 × $8.00 (60 800) (1)
Variable costs 7 600 × $2.50 (19 000) (1)
Contribution 106 400
Fixed costs (65 000) (1)
Profit for the month 41 400 (1)
4(f) Alternative answer
$
Revenue 30.00
Direct material (5.50)
Direct labour (8.00) (1)
Variable costs (2.50) (1)
Contribution 14.00
Total contribution 106 400
Fixed costs (65 000) (1)
Profit for the month 41 400 (1)
4(g) For changing supplier (Max 3) 7
• Profits/contribution will be greater (1)
• Will not have to rely on overtime working which will reduce costs (1)
• Better working relationship with the sole supplier (1)
Against changing supplier (Max 3)
• Will quality of materials be less? (1)
• Will there be supply problems when delivering from overseas (1)
• Will new supplier be reliable? (1)
• Will reduced output lead to the loss of regular orders(1)
• Will reduced output lead to possible redundancies.(1)
Advice (1)
Accept other valid responses.
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Accounting 9706/22 for May/June 2021 is out of 90 marks, with 1 hour 30 minutes to answer it, across 4 questions.
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