Accounting 9706/23 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.
Adam owns a retail business. He is aware that he must follow certain accounting concepts when preparing his business’s financial statements.
REQUIRED
(a) Explain how each of the following concepts is applied when preparing a business’s financial statements.
(i) Consistency
…… [2]
(ii) Realisation
…… [2]
(iii) Materiality
…… [2]
Additional information
Adam has completed the trading section of the income statement. However, some errors had been made.
Income statement for the year ended 31 December 2020
$ $
Revenue 186 500
Less returns outwards (3 180)
183 320
Opening inventory 14 830
Purchases 93 710
Less returns inwards (2 940)
Add carriage inwards 730
106 330
Less closing inventory (12 670)
Cost of sales 93 660
Gross profit 89 660
The following information is also available.
1 No record had been made of goods taken for own use by Adam, $580.
2 Closing inventory included 14 damaged items which cost $30 each. Six of these items cannot be sold and are to be regarded as waste. The remaining items could be sold for $35 each but will incur total repairs cost of $56.
REQUIRED
(b) Calculate a revised figure for gross profit for the year ended 31 December 2020.
…… [7]
Additional information
The following balances were extracted from the books of account of Adam’s business on
31 December 2020.
$
Discounts 1 580 credit
Furniture and equipment cost 18 220 provision for depreciation (at 1 January 2020) 5 370
Marketing expenses 4 850
Motor vehicle cost 16 800 provision for depreciation (at 1 January 2020) 13 900
Office expenses 2 950
Premises cost 160 000 provision for depreciation (at 1 January 2020) 9 600
Provision for doubtful debts (at 1 January 2020) 530
Rent receivable 6 640
Repairs and maintenance 1 970
Trade receivables 9 800
Wages and salaries 31 280
The following information is also available.
1 Repairs and maintenance included a payment of $380 for installation of new equipment on
1 January 2020.
2 The provision for doubtful debts should be maintained at 5% of trade receivables.
3 Rent receivable of $1800 for the three months ended 28 February 2021 had not been received.
4 A payment of $2000 for a five-month advertising campaign which began on 1 November 2020 was outstanding.
5 Depreciation should be provided on non-current assets as follows:
Furniture and equipment at 20% per annum using the reducing balance method
Premises at 2% per annum using the straight-line method
No depreciation is charged on non-current assets in the year of sale.
6 No record had been made of the sale of the only motor vehicle on 1 December 2020 for
$1350.
REQUIRED
(c) Prepare the income statement for the year ended 31 December 2020. Start the statement with your gross profit figure in part (b).
Income statement for the year ended 31 December 2020
$ $
[10]
Additional information
Adam would like to improve his business’s profitability. He has been considering the following proposals.
Proposal 1: Reducing inventory levels
Proposal 2: Increasing mark-up by 5% on the current level
REQUIRED
(d) Advise Adam which proposal he should choose. Justify your answer by considering both proposals.
[7]
[Total: 30]
Mark scheme
1(a)(i) Consistency – requires policies to be used in the same way each accounting period (1) so that valid comparisons can be 2
made of figures (1)
Illustration (1)
Max (2)
Accept other valid responses
1(a)(ii) Realisation: revenue should only be recognised when goods are invoiced or money received (1) to ensure that reported 2
profits are based on certainty (1)
Illustration (1)
Max (2)
Accept other valid responses
1(a)(iii) Materiality: financial statements only record information which is significant (1). Something is material only if its exclusion 2
would be misleading (1)
Illustration (1)
Max (2)
Accept other valid responses
1(b) 7
$ $
Revenue 186 500
Returns inwards (2 940) (1)
183 560
Opening inventory 14 830
Purchases 93 710
Drawings (580) (1)
Carriage inwards 730
Returns outwards (3 180) (1)
105 510
Closing inventory W1 (12 474) (3)
Cost of sales 93 036
Corrected gross profit 90 524 (1)OF
W1 $12 670 – $16 (1) – $180 (1) = $12 474 (1)
Accept alternative approaches
1(c) Income statement for the year ended 31 December 2020 10
$ $
Gross profit 90 524
Add: Discounts received 1 580 (1)
Decrease in provision for doubtful 40 (1)
debts (W1)
Rent receivable (W2) 7 240 (1)
8 860
99 384
Less: marketing expenses (W3) 5 650 (1)
Office expenses 2 950
Repairs and maintenance (W4) 1 590 (1)
Loss on sale of motor vehicle (W5) 1 550 (1)
Wages and salaries 31 280
Depreciation
Furniture and equipment (W6) 2 646 (2)
Premises (W7) 3 200 (1)
(48 866)
Profit for year 50 518 (1)OF
1(c) Workings
W1 Provision for doubtful debts: original $530 less new provision (5% × $9 800, i.e. $490); decrease $40 (1)
1
W2 Rent receivable: TB $6 640 + amount due × $1800, i.e. $600 ; $7 240 (1)
3
2
W3 Marketing expenses: $4 850 + accrual × $2000, i.e. $800 ; $5 650 (1)
5
W4 Repairs and maintenance: $1 970 – £380 capital expenditure; $1 590 (1)
W5 Loss on sale of motor vehicle: nbv $2 900 less proceeds $1 350; $1 550 (1)
W6 Depreciation of furniture and equipment: TB cost $18 220 + capital expenditure $380, i.e. $18 600 (1) less provision for
depreciation $5 370, i.e. nbv $13 230 × 20% = $2 646 (1)
W7 Depreciation of premises: $160 000 × 2% = $3 200 (1)
1(d) Proposal 1 (Max 3) 7
For:
Possible reduction in storage costs (1)
Reduces the risk of goods becoming unsaleable as they become dated (1)
Against:
Reduced range of goods available to customers could lead to lost sales (1)
Could risk items selling out leading to lost sales (1)
Proposal 2 (Max 3)
For:
Increased profits if business remains competitive (1)
Higher price may be perceived as better quality (1)
Against:
Increased profits could be offset by reduction in sales (1)
Higher price could deter existing customers (1)
Advice (1)
Accept other valid responses
Hamid prepares control accounts to check the accuracy of his business’s purchases and sales ledgers.
REQUIRED
(a) Explain two benefits to a business of using control accounts other than checking the arithmetical accuracy of ledger accounts.
1 ……
2 ……
[4]
Additional information
On 31 January 2021 Hamid provided the following information:
1 The balance of the sales ledger control account on 1 January 2021 was $17 820.
2 Totals for January 2021 from books of prime entry
$
Cash book
Discount allowed 430
Receipts from trade receivables 16 230
General journal
Contra entries with purchases ledger 890
Sales journal 18 440
Sales returns journal 310
3 On 31 January 2021 a credit customer had overpaid his account by $170.
REQUIRED
(b) Prepare the sales ledger control account for January 2021.
Sales ledger control account
$ $
[6]
Additional information
On 31 January 2021 the total of balances in the purchases ledger was $12 860, but the balance of the purchases ledger control account on this date was $12 980.
The following errors were discovered.
1 The total of the discounts received column of $110 had not been posted from the cash book.
2 The total of the purchases returns journal had been overstated by $250.
3 Interest of $130 charged by a supplier because of an overdue balance had been debited to the supplier’s account.
REQUIRED
(c) Prepare statements to show corrected totals for:
(i) the purchases ledger balances
Correction of purchases ledger balances
Details $
Incorrect total 12 860
[2]
(ii) the purchases ledger control account balance
Correction of purchases ledger control account balance
Details $
Incorrect balance 12 980
[3]
[Total: 15]
Mark scheme
2(a) Check for fraud / deter fraud / make fraud more difficult (1) as the work of the ledger clerk is checked by another member 4
of staff (1)
Provides quick access to totals for trade receivables/trade payables (1) to facilitate preparation of financial statements (1)
Accept other valid responses
2(b) Sales ledger control account 6
$ $
Balance b/d 17 820 Bank 16 230
(1)
Sales 18 440 (1) Discounts allowed 430
Balance c/d 170 Purchases ledger 890 (1)
control a/c (Contra)
Sales returns 310 (1)
Balance c/d 18 570
36 430 36 430
Balance b/d 18 570 (1)OF Balance b/d 170 (1)
2(c)(i) Correction of purchases ledger balances 2
Details $
Incorrect total 12 860
Add interest on overdue account (error 3) 260 (1)
Corrected balance 13 120 (1)OF
2(c)(ii) Correction of purchases ledger control account balance 3
Details $
Incorrect balance 12 980
Less discounts received (error 1) (110) (1)
Add purchases returns (error 2) 250 (1)
Corrected total 13 120 (1)OF
Cherry, Winston and Yupar were in partnership sharing profits and losses in the ratio 3 : 5 : 2. The partners decided to dissolve their partnership on 1 December 2020. On this date the partnership’s statement of financial position was as follows.
Assets $ $
Non-current assets at net book value
Premises 97 000
Furniture and equipment 22 000
119 000
Current assets
Inventory 17 400
Total assets 136 400
Capital and liabilities
Capital accounts
Cherry 18 300
Winston 54 900
Yupar 26 700
99 900
Current accounts
Cherry (5 740)
Winston 2 290
Yupar 820
(2 630)
Non-current liability
Loan from Yupar 18 000
Current liabilities
Trade payables 14 800
Bank overdraft 6 330
21 130
Total capital and liabilities 136 400
The following information is also available.
1 Winston took over the equipment at a valuation of $7200.
2 Premises and furniture were sold for $61 100 and a cheque for this amount was received.
3 Inventory was sold at a loss of $5200. A cheque was received for the amount.
4 Trade payables were settled in full by cheque after deducting a 5% cash discount.
5 The expenses of dissolution were paid by cheque, $2140.
6 The amounts owed by, or to, the partners were settled by cheque.
REQUIRED
(a) Prepare the realisation account to show the profit or loss made on the dissolution of the partnership.
Realisation account
$ $
[7]
(b) Prepare, on the next page, the capital accounts of the partners recording the dissolution and final settlement of the amounts owed to, or by, each partner.
Capital accounts
Cherry Winston Yupar Cherry Winston Yupar
$ $ $ $ $ $
13
[5]
Additional information
The partners had decided to dissolve their partnership because of disagreements on important decisions.
REQUIRED
(c) State three other reasons why a partnership might be dissolved.
1 ……
2 ……
3 ……
[3]
[Total: 15]
Mark scheme
3(a) Realisation account 7
$ $
Assets to be realised Capital Winston 7 200 (1)
Premises 97 000 Bank 61 100 (1)
Furniture and equipment 22 000 (1) Bank 12 200 (1)
Inventory 17 400 Discounts received 740 (1)
Bank 2 140 (1) Realisation loss:
Cherry 17 190
Winston 28 650 (1)of
Yupar 11 460
138 540 138 540
3(a) Alternative answer
Realisation account
$ $
Assets to be realised Capital Winston 7 200 (1)
Premises 97 000 Bank 61 100 (1)
Furniture and equipment 22 000 (1) Bank 12 200 (1)
Inventory 17 400
Bank: trade payables 14 060 Trade payables 14 800 (1*)
row
Bank 2 140 (1) Realisation loss:
Cherry 17 190
Winston 28 650 (1)OF
Yupar 11 460
152 600 152 600
3(b) Capital accounts 5
Cherry Winston Yupar Cherry Winston Yupar
$ $ $ $ $ $
Realisation 7 200 Balances 18 300 54 900 26 700
a/c b/d
Current 5 740 Current 2 290 820 (1)
account accounts row
Realisation 17 190 28 650 11 460 (1)OF Loan 18 000 (1)
(loss) row
Bank 21 340 34 060 (1)OF Bank 4 630 (1)OF
both
22 930 57 190 45 520 22 930 57 190 45 520
3(c) Partnership is making a loss (1) 3
Retirement of a partner (1)
Death of a partner (1)
Objectives of business achieved (1)
Bankruptcy of a partner (1)
Accept other valid responses
Max 3
T Limited manufactures a single product. The following budgeted information is available.
Per unit
$
Direct materials 8.40
Direct labour 14.50
Other variable costs 2.30
Fixed costs 8.00
Each unit is sold for $36. Budgeted monthly production and sales are 1200 units.
REQUIRED
(a) Calculate the monthly break-even point in units.
…… [4]
(b) Calculate the margin of safety:
(i) in units
…… [1]
(ii) in revenue
…… [1]
(c) Identify three assumptions made when using break-even analysis.
1 ……
2 ……
3 ……
[3]
Additional information
In January 2021 the company made and sold 1120 units.
REQUIRED
(d) (i) Calculate the contribution to sales ratio.
…… [1]
(ii) Calculate the profit made in January 2021.
…… [2]
Additional information
In March 2021 a machine fault meant that only 75% of budgeted output could be produced. The directors considered two options.
Option A
1 Reduce normal output by 25%; as a result, materials cost would be affected because trade discount of 20% on bulk orders would not be available. All other costs would remain the same.
2 Buy in units from a competitor at $27.20 per unit. The competitor can supply a maximum of
250 units and will charge $125 for delivering this quantity.
Option B
1 Hire a replacement machine at a cost of $1600 for the month.
2 The replacement machine could make an additional 200 units per month.
3 All other costs would remain the same.
REQUIRED
(e) Calculate the profit for March 2021 for:
(i) Option A
…… [7]
(ii) Option B
…… [3]
(f) Advise the directors which option they should choose. Justify your advice by considering both options.
…… [5]
Additional information
Recently a system of budgetary control has been introduced by T Limited. However, there have been concerns that the system has not worked well.
REQUIRED
(g) State three limitations of budgetary control.
1 ……
2 ……
3 ……
[3]
[Total: 30]
Mark scheme
4(a) 9 600 (1) 9 600 4
= = 889 (1) OF
36 − 25.20 (1) 10.80 (1) OF
4(b)(i) 1 200 – 889 = 311 units (1)OF 1
4(b)(ii) 311 × $36 = $11 196 (1)OF 1
4(c) Sales and production levels are the same. (1) 3
Total fixed costs are constant. (1)
Variable costs per unit are the same. (1)
Selling price per unit remains the same. (1)
Product mix remains constant. (1)
Costs can be easily classified as fixed or variable. (1)
Accept other valid responses
Max 3
4(d)(i) 10.80 1
Ratio is × 100 = 30% (1)OF
36
4(d)(ii) 2
$
Contribution per unit 10 .80
× qty 1 120
Total contribution 12 096 (1)OF
Fixed cost 9 600
Profit 2 496 (1)OF
4(e)(i) Option A 7
Inhouse Buy
$ $ $
Selling price 36 36
Direct materials 10 .50
Direct labour 14 .50
Other variable costs 2 .30
Total variable costs 27 .30 (1) 27 .70 (1)
Contribution per unit 8 .70 8 .30
Qty x 900 250
Total contribution 7 830 (1)OF
Fixed costs 9 600 (1)
Profit/(loss) (1 770) (1)OF 2 075 (1)OF
Profit (1 770) + 2 075 = 305 (1)OF
Accept alternative approaches
4(e)(ii) Option B 3
$
Contribution per unit 10 .80
Qty × 1 100
Total contribution 11 880 (1)
Fixed costs 11 200 (1)
Profit 680 (1)OF
Alternative
$ $
Sales 39 600
Direct materials 9 240
Direct labour 15 950
Other variable overheads 2 530
27 720 (1)
Fixed costs 11 200 (1) 38 920
Profit 680 (1)OF
Accept alternative approaches
4(f) Option A (Max 2) 5
For Against
Produces a profit (1)OF Will supplier be reliable? (1)
Keeps production closer to current levels so Will quality be maintained? (1)
more likely that regular orders will be
satisfied. (1)
Option B (Max 2)
For Against
Produces a larger profit than option A (1)OF Production will be below current monthly
output so some staff could be idle (1)
Quality likely to be maintained as Some regular customers may be lost
production remains in-house (1) because production below normal output
(1)
Advice (1)
Accept other valid responses
4(g) Demotivated workforce (1) 3
Unexpected opportunities ignored (1)
Resources used inefficiently (1)
Accept other valid responses
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Accounting 9706/23 for May/June 2021 is out of 90 marks, with 1 hour 30 minutes to answer it, across 4 questions.
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